Cuts Not Enough | Russell T. Rudy Energy LLC
Writing in “Rigzone”, author Delia Morris contends that the extension of OPEC cuts of 1.8 million barrels of oil per day (bopd) is not deep enough to reduce the global glut and raise prices this year or next.
Morris also cites weak demand, and consequently high inventories, of gasoline in the U. S. as a major cause for concern. The U. S. Energy Information Administration reported an actual increase in domestic gasoline stocks for the week ended June 9, as demand is 5% lower than for the same period last year.
While demand is a concern, there are supply issues which are working against the market rebalancing and prices recovering. Originally OPEC and its allies had exempted Nigeria and Libya from production quotas as both countries had lost production due to civil strife. However, output has been steadily recovering since production cutbacks went into effect. When cutbacks were extended, Nigeria and Libya were still exempt, and are still increasing output. There are further concerns that some countries, such as Iran and Iraq, are starting to cheat on their quotas.
In order to offset these potential production increases, Saudi Arabia is reducing its shipments to the U. S. and raising prices to Asian buyers, which should further reduce exports. If this strategy works as planned, U. S. crude inventories will drop. According to Morris, this would be highly significant, as “…most crude traders essentially use U. S. crude inventory levels as a proxy for the health of global crude markets due to the availability and quality of data.” However, some industry observers do not see this as a reduction in Saudi output. Rather, they contend that the Saudis will keep production at the same levels and divert crude that would have been exported, to power generation during the summer season when demand for air conditioning is highest in the kingdom.
At any rate, rebalancing might be further delayed by non-OPEC production increases. The International Energy Agency (IEA) now predicts that output from these countries will grow by 1.5 million bopd in 2018, twice the estimated increase for this year. Most of this increase is expected to come from domestic shale oil. Unfortunately, the IEA projects global oil demand growing by only 1.4 million bopd next year, primarily in China and India.
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/150628/Commodity_Weekly_OPEC_Cuts_not_Cutting_It/?pgNum=1 .
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