OPEC Report Highlights Persistent Oil Oversupply

Andamento del mercato - 12/07/2017

Hot on the heels of Tuesday’s account from Bloomberg highlighting oil production from Saudi Arabia topping 10.000 million barrels per day (bpd) last month, OPEC’s monthly report indicated that a different culprit is behind the prevailing oversupply problem; US shale. Per data revealed earlier in the session, total OPEC production rose to 32.6 million barrels per day in June, driven primarily by production gains in exempt nations Libya and Nigeria.

Libya in particular led the way higher after bringing another 127,000 bpd in output back online during the month, trailed by Nigeria’s 97,000 bpd gain.  Furthermore, the Saudis exceeded their own quota, indicating that their patience for rebalancing the energy market may be gradually waning, especially after global supply outstripped demand by a whopping 700,000 bpd during the first half of 2017.  Adding to the troublesome outlook is the assumption that the figure will grow to 900,000 bpd during the first quarter of 2018.

Although Libya and Nigeria may enter discussions about capping their output after initially being granted exemptions from output cuts, in the grand scheme of things, these talks will fail to address the elephant in the room.  US production has surged back to life, with the EIA now projecting an average of 9.300 million bpd of production for the year.  Even with the modest revision lower to their projections for 2018 output unveiled earlier in the week, US shale remains a considerable force in the oversupply equation and a factor that is unconstrained by the output deal forged by OPEC members and non-OPEC producers.

While crude inventories are gradually falling on a global scale, no measurable increase in demand may prevent the oil market from achieving equilibrium before the second half of 2018.  If oil prices remain around current levels, bringing more shuttered production back online will likely create a new dilemma for OPEC and potentially weigh on prices for some time to come.  Crude futures may be temporarily elevated on the back of falling inventories, but no clear strategy to reduce overall supply will come at a steep price for producers if they fail to reach an adequate consensus to end the glut.

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