Monday, 15 May 2017

OPEC contends with data cacophony as it reviews oil output cut

In Oil & Companies News 15/05/2017

When OPEC meets on May 25 to review its production cut deal, it will have to sift through an array of market indicators and analyst projections that paint an often confusing picture of oil supply and demand.
For instance, OPEC estimated in its monthly oil market report Thursday that OECD commercial oil inventories were still some 276 million barrels above the five-year average, the benchmark it is aiming for with its output cuts.
While those high stocks have led to doubt among traders that the cuts have been effective, OPEC said in its report that this was the second month in a row that stocks have drawn, indicating that the market’s oversupply was trending downward.
On the other hand, the resilience of US shale prompted OPEC to revise up its projection of US supply for 2017 by 280,000 b/d from last month’s report, which it now sees at 820,000 b/d above last year’s.
The US Energy Information Administration on Tuesday also revised upward its forecast for 2017 US production by 90,000 b/d from the previous month to show year-on-year growth of 440,000 b/d.
As for demand, OPEC is projecting growth of 1.27 million b/d globally this year, while the EIA has pegged growth at 1.56 million b/d.
The International Energy Agency, which has generally been more bullish than either OPEC or the EIA, issues its latest monthly market report Tuesday.
Given so much uncertainty, many analysts are expecting OPEC simply to roll over their 1.2 million b/d production cut into the second half of the year.
With inventories trending in the right direction, from OPEC’s perspective, and with the peak summer direct burn season ahead, prospects of a deeper cut may be a bridge too far.
An extension of longer than six months may be warranted to signal OPEC’s commitment to market rebalancing, but it may also want to preserve flexibility to boost output in the second half if demand rebounds.
Whatever it decides, OPEC will be mindful of potential price chaos if no deal is reached on an extension at the May 25 meeting in Vienna, with the market seemingly already pricing in a rollover.
Director at consultancy Petro-logistics and former chief economist at Shell Trading Adam Ritchie said this likely sets up a more interesting meeting when OPEC gathers in late November or December for its second regular meeting of the year. OPEC will announce the date of that meeting on May 25.
“I think we’re unlikely to see much beyond a rollover this period,” Ritchie said at the Platts Global Crude Summit. “Depending on what happens with demand and what happens with shale, we’re set for a much more exciting December, and then the question [for OPEC] is, do we need to do more?”
Within OPEC, potential recoveries in Libya and Nigeria may also complicate the picture.
The two countries are exempt from the cut deal as they deal with militant attacks that have hobbled their oil sectors. But conditions appear to be improving in both countries, meaning new supply could come online and offset some of the rest of OPEC’s cuts.
Libya, which produced 550,000 b/d in April, according to the latest S&P Global Platts OPEC production survey, is now producing more than 800,000 b/d, according to its National Oil Corporation.
The country recently resumed production from the Sharara and El Feel fields after reaching an agreement with the militia controlling a pipeline connecting them to the Zawiya port.
Meanwhile, Nigeria, which produced 1.65 million b/d in April, according to the Platts survey, appears set to restart loadings of its Forcados crude, with trading sources telling Platts on Friday that two 950,000-barrel cargoes were scheduled to load this month.
Forcados has been under force majeure, with a key pipeline shut for most of last year due to militant attacks.
OPEC projects that the call on its crude for 2017 will average 31.92 million b/d, about 190,000 b/d above its April output of 31.73 million b/d, according to its monthly oil market report.
Full recoveries by Libya and Nigeria may prompt OPEC to call for their inclusion in any cut extension. Libya’s output was above 1.6 million b/d before its civil war began in 2011, while Nigeria was formerly Africa’s top producer with output of 1.95 million b/d as recently as July 2015.
“OPEC production will not stay the same,” chief economist with energy consultancy Rapidan Group Fareed Mohamedi said. “Libya, Nigeria — maybe we’re being too optimistic about the political situation in both countries, but in general things seem to be going to a better situation on that front.”
Mohamedi has a bearish outlook for oil prices and said he is skeptical the market is on the path to rebalancing as OPEC hopes, with doubts about demand growth and continued OPEC compliance with cuts if they are extended.
Like Ritchie, he predicts OPEC will likely roll over its production cut agreement at the May 25 meeting, but suspects the group will face a greater challenge going forward.
“I think the next [meeting] is the real difficult one,” he said. “Maybe this time in May they’ll roll it over so they don’t destabilize the market too much. But going forward in 2018, if there are still market surpluses, I think they’re going to have to face reality.”

Source: Platts