Oil prices drop as OPEC report gives market conflicting signals

Oil prices dived to three month lows today upon the release of a new OPEC report, which contained data that spooked the markets.

Offshore staff

HOUSTON -Oil prices dived to three-month lows today upon the release of a new OPEC report. The monthly update contained data that spooked the markets, including rising oil stocks despite last November’s deal to curb supply, and upped production levels from outside OPEC.

At the time of this writing, Bloomberg Markets shows April West Texas Intermediate at $47.64/bbl on NYMEX, down from $48.14/bbl yesterday and $53.14/bbl on March 7. Brent Crude is at $50.79/bbl, down from $51.35/bbl yesterday and $55.92/bbl on March 7.

OPEC and certain non-OPEC producers such asRussia reached a deal at the end of last year to remove 1.8 MMbbl/d from the market for six months beginning Jan. 1.

Non-OPEC countries were not seen as the only cause of concern. MemberSaudi Arabia, after cutting more than required in January to ensure strong compliance, has increased production to 10.011 10 MMbbl/d in February, up from 9.748 MMbbl/d in January. Both figures are in line with its production targets.

The organization overall still showed falling production rates, to 31.958 MMbbl/d in February from 32.097 MMbbl/d in January.

The US, which did not take part in the production deal, was shown to have output increase to 9 MMbbl/d in February, up 430,000 b/d from September 2016, according to the OPEC report, MarketWatch pointed out. OPEC’s numbers arrived among increasing reports that the resurgence of US shale drilling could threaten the cartel’s cuts, which are up for re-evaluation in June.

Reuters said today that the increased oil inventories despite the deal, and increased non-OPEC production in2017, suggest “complications in an effort to clear a glut and support prices.”

"Despite the supply adjustment, stocks have continued to rise, not just in the US, but also in Europe," OPEC said in the report.

Elsewhere, OPEC’s report noted that “oil futures were up month-over-month to their highest levels in more than a year-and-a-half, while trading in a relatively narrow range for two months now.

“The high level of conformity with the supply adjustment among OPEC and other producers has greatly supported the gains. But stock builds in the US and elsewhere, as well as an increase in theUS oil rig count capped these gains.”

On March 7, it was widely reported by CNBC and other outlets that both OPEC and non-OPEC producers including Russia had “reaffirmed their commitment to their production agreement…and expressed optimism there would be full compliance” in an unplanned press briefing at CERAWeek by IHS Markit.

The news service reported that alongside Russian Energy Secretary Alexander Novak, OPEC Secretary General Mohammad Sanusi Barkindo, Iraq Oil Minister Jabbar Ali Al-Luiebi, Mexico's deputy oil minister Aldo Flores-Quiroga, Saudi Arabia Energy Minister Khalid Al-Falih, said he was satisfied with the progress towards the production cuts. Further, when questioned on the rise of shale drilling and any potential impacts on the OPEC agreement, Al-Falih did not seem concerned.

"The comeback of shale to a certain degree is not only welcome and acceptable but is necessary because of demand growth and the decline elsewhere," CNBC quoted Al- Falih as saying at the conference.

Minor Russian producers slow to comply

However, in a Reuters report yesterday, Rosneft told the news service directly that it expressed a different opinion.

"It became evident that US oil output has become and will remain a new global oil price regulator for the foreseeable future," Rosneft told Reuters in a written response. "There are significant risks the (OPEC-led) deal won't be extended partially because of the main participants, but also because of the output dynamics in the United States, which will not want to join any deals in the foreseeable future."

Among this news,Rystad Energy has released analysis on recent production data released from Russia, with the analyst firm noting that certain producers are slow to reduce their output.

Russian oil output averaged 11.11 MMbbl/d in February 2017, representing no further output reductions relative to the January 2017 level, reports Rystad Energy. Since early December 2016, the Russian government has been reassuring the industry that the country will reach the production cut target of 300,000 b/d relative to October 2016 by April 2017.

According to the latest production numbers by operator, the top three producers, Rosneft,Gazprom Neft, and Lukoil, are on track to meet their production targets. Rosneft contributed the most to the output reduction so far, while most of the smaller operators, such as Tatneft, Novatek, and others, have not yet shown compliance with their individual production cut targets.

“Our Russian production forecast for March 2017 is 11.03-11.05 MMbbl/d, a cut of an additional 60,000 b/d from February 2017 output. As of today, we see an upside risk to Russian oil output due to the lack of evidence of production cuts from the smaller producers,” says Veronika Akulinitseva, analyst at Rystad Energy.

Relative to October 2016 (output of 11.23 MMbbl/d), Russia has so far reduced output by only 40% of the agreed 300,000 b/d cut.

“While it is possible that Russian producers will meet their full compliance target cut by April 2017, we are more skeptical that they will, given their February 2017 production numbers and that the cut is voluntary by producers,” says Nadia Martin Wiggen, VP Markets at Rystad Energy.

Of additional concern is the example non-compliance Russia sets for other non-OPEC production cutters, Rystad said.

03/14/2017

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