The underwhelming response of markets to last week’s OPEC meeting reflects ongoing skepticism over the viability of the extended output cut deal agreed by key oil producers, says Nick Coleman, oil specialist at S&P Global Platts.
“There is a sense that OPEC was treading water – it didn’t really take decisive action. There’s a weariness in oil markets that we’ve been hearing for many months now that the market was about to tighten, that those global oil stocks were about to fall and it didn’t really happen,” Coleman told on Thursday.
Coleman’s comments came after oil prices fell to their lowest level in three weeks on Wednesday following data showing that monthly OPEC production rose for the first time this year during May. This helped Brent to notch up its fifth consecutive monthly loss and WTI to post its third straight monthly drop.
Both commodities were trading higher again in Thursday’s session with Brent recovering by 0.93 percent to $51.22 a barrel by 08:00 a.m. London time and WTI just shy of 1 percent higher at $48.79 a barrel. Some oil bulls are pinning near-term hopes for a rise in the oil price on seasonal factors which, according to Coleman, include an uptick in demand as the U.S. summer driving season kicks off and Saudi Arabians turn up their air conditioning.
The volatility in the oil price during May reflected an initial build up and then dashing of overegged expectations that the oil cartel would secure deeper measures than the nine-month extension of its existing OPEC-led deal. Strong efforts to comply with the deal by many OPEC members have been partly undone recently by increases in production by countries with exemptions, such as Libya and Nigeria.
Meantime, Coleman questioned how long the deal can really hold with many member states having a lot of opportunity to play for.
“OPEC is competing internally for the Asian market and they are seeing a lot of oil coming from new sources into Asia from the U.S., from the North Sea, from Kazakhstan. Can these individual OPEC countries really maintain their oil production constraint at the risk of losing market share in Asia?” he asked.
Additionally, there’s an “uneasy stand-off” underway between OPEC and U.S. shale producers, many of whom have comprehensively restructured balance sheets and bounced back from the low points they had sunk to a few years ago.
“In the U.S. those shale producers are looking in pretty good shape now. They’ve paid off their debts and every little rise in the oil price encourages them to increase their production. They’re very confident, I think, that they can further increase American production,” asserted the oil specialist.
Given the average time lag between putting a new shale well into operation and seeing oil pumped out of it is around six months, the uplift in oil drilling in recent months is likely to mean that shale production will continue at least for the rest of this year.
“That cancels out to some extent OPEC’s efforts,” Coleman added.