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Vitol's View | Russell T. Rudy Energy LLC

“World Oil” reports that Vitol, the world’ largest independent trader, sees the oil production of OPEC and its allies as “lower for longer” as they try to reduce the global glut and raise prices. Kho Hui Meng, the head of Vitol’s Asia group, thinks that production quotas must be extended beyond mid-year, just to keep prices from eroding further.  He attributes this to sluggish demand growth and surging U. S. production.

Kho concedes that demand is growing, but not quickly enough for inventories to shrink and prices to recover. The International Energy Agency (IEA), the energy advisor to the members of the Organization for Economic Cooperation and Development (OECD), recently reduced its forecast for growth in demand for this year by 100,000 barrels of oil per day (bopd) to 1.3 million.  This was based on an anticipated slowdown in consumption within the OECD nations, an abrupt economic deceleration in India and Russia, and concerns that China might follow suit.  Kho feels that the IEA forecast is overly optimistic, noting that so far this year, demand has only increased by 800,000 bopd.

Not everyone is as pessimistic about demand growth as Kho. Saudi Energy Minister, Khalid Al-Falih, thinks Chinese demand will continue to grow at recent rates due to expansion of the transport sector and expects India’s economy to expand by 7% this year.

Of course there are some problems on the supply side as well. U. S. production could increase by as much as 500,000 bopd if current trends hold.  The IEA conjects that global crude inventories might have actually increased in the first quarter of this year, despite almost perfect compliance with production quotas by OPEC, and its allies.  In fact, the world’s two largest exporters, Saudi Arabia and Russia, have already signaled that output reductions might have to be extended into 2018 to reduce inventories.

Nawaf Al-Sabah, CEO of Kuwait’s national oil company, Kufpec, concedes that “We’ve always talked about the call on OPEC, how much OPEC oil is needed to satisfy world demand. Now, in the new paradigm, it’s really becoming the call on shale.  And the market is setting itself at the marginal cost of a shale barrel.”

Kho concludes that if OPEC and its allies extend production cuts beyond June, and continue to comply, and U. S. demand during the summer driving season improves significantly, prices could return to the low $50’s. Until then, he is in the “lower for longer” camp.

To read the article in its entirety, please go to http://www.worldoil.com/news/2017/5/10/top-oil-trader-warns-that-opec-efforts-could-be-futile .

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