Article / 13 July 2017 at 12:30 GMT

Oil bias remains negative on falling Opec compliance

Head of Commodity Strategy / Saxo Bank
  • Improved US oil stocks data increasingly offset by price-negative Opec news
  • IEA highlights big recovery in Libya and Nigeria output and lower Opec compliance
  • According to IEA, Opec compliance sank to 6-month low of 78% in June
  • US shale oil producers showing no sign of being pushed out by low prices
  • US output jumped 59,000 b/d last week to 9.39 million b/d, highest since July 2015
  • Short-term outlook for oil remains challenging

Oil rig in the Gulf
 Oil rig in the Gulf. IEA spotlights dramatic recovery at some producers, 
weak Opec curbs compliance at others. Photo: Shutterstock

By Ole Hansen

Three weeks of improved US oil stocks data have increasingly been offset by price-negative news from Opec. The International Energy Agency's new  monthly energy report today put it this way: "Each month something seems to come along to raise doubts about the pace of the re-balancing process. This month, there are two hitches: a dramatic recovery in oil production from Libya and Nigeria and a lower rate of compliance by Opec with its own output agreement."

IEA estimates

Source: IEA

According to the IEA's calculations, Opec's rate of compliance dropped to a six-month low last month, to 78% from 95% back in May. Adding to this a combined 700,000 barrel/day production increase from Libya and Nigeria — both exempt from cutting — the cartel's efforts are currently being eroded.  

Libya and Nigeria oil production

While US weekly data became a major drag on the market in May and June, recent reports have turned more supportive, with bigger-than-expected inventory declines, especially in crude oil. 

US crude and gasoline inventories
The persistently large overhang of global supply combined with the slow reduction currently seen has sharpened the focus on the need for a lower price for longer. This is required to affect high- cost US shale oil producers' ability or willingness to keep adding rigs and boosting production.

After staying flat for the past five weeks, US oil production jumped 59,000 b/d last week to 9.39 million b/d, the highest since July 2015 and just  213,000 b/d below the record from back then. US shale oil producers meanwhile have been adding eight new rigs on a weekly basis since hitting a low point last May, and so far this pace shows now signs of slowing. 

US production and rig count
These developments have kept sellers in control, with rallies towards current resistance at $47.3/b in WTI and $50/b on Brent crude being met by fresh selling. Until the spell of lower highs, as seen since February, is broken, the downside risk remains the greatest. 

WTI crude oil, first month cont.
The July peaks in WTI and Brent corresponded to a 50% retracement of the May-to-June selloff. Until these levels are broken, hedge funds holding a near-record gross short position of 351 million barrels will see no reason to lower their bearish bets. 

Combined oil positioning

Conclusion: The short-term outlook for oil remains challenging, with the best chance of recovering being an unforeseen event that forces a reduction in the near-record short position now held in WTI and Brent crude oil. A sustained recovery back towards the higher end of the established range, however, would require several of the following to unfold:

  • Slowing US rigs and production growth in response to lower prices
  • Strong seasonal reduction in US crude oil stocks (normally runs until end-September)
  • Opec maintains discipline, especially from Iraq and Iran
  • Key Opec members reduce Q3 exports to meet increased domestic consumption
  • Slowdown in production growth from Libya and Nigeria. 

— Edited by John Acher

Ole Hansen is head of commodity strategy at Saxo Bank


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