Oil prices continue to weaken as global glut grows

Oil prices remain under pressure as rising US production pushes back impact of OPEC-led cuts.
International benchmark Brent crude oil futures dropped as low as $45.4 per barrel on Tuesday – their lowest level since November 2016 – and dropped to similar levels early on Wednesday before recovering slightly. The United States benchmark West Texas Intermediate dropped to $42.8/bbl on Tuesday and was trading at around $43/bbl at the time of publication.
OPEC members and a group of 11 non-OPEC producers led by Russia agreed on 25 May to extend their 1.8 million barrels per day (MMb/d) output cut for a further nine months. The original deal was for cuts of 1.2 MMb/d by OPEC members and nearly 600,000 b/d by non-OPEC countries to be made during the first six months of 2017. This was initially extended until the end of June, but now the cuts have been extended until the end of March 2018.
The oil price weakness comes despite heightened geopolitical tensions between the US and Russia over Syria, as well as a rift between Gulf Cooperation Council (GCC) members Saudi Arabia and Qatar over the latter’s alleged support of terrorist groups. Saudi Arabia, the United Arab Emirates and Egypt have broken diplomatic ties with Qatar, claiming the country – the world’s largest LNG exporter – has supported Sunni and Shia terrorist groups in the Middle East. They also allege that it has been accommodating Iran in a way that the other GCC members deem unacceptable.
The recent weakness in oil prices stems from concerns that rising global production, led by the US, is keeping stocks stubbornly high. Oil-indexed commodities including gas and LNG have also come under pressure, along with others such as gold. The Goldman Sachs Commodities Index, which tracks the most liquid commodity futures markets, has dropped to its lowest level since 11 November 2016. Higher production from Nigeria and Libya – which were exempted from the OPEC/non-OPEC deal because of their history of disrupted production – and weaker demand growth in China have helped depress sentiment in the oil market.
Gloomy outlook for 2018
The weak oil price outlook now looks set to extend into 2018 as the inventory overhang is still not being absorbed by rising demand. Earlier this month, the International Energy Agency (IEA) gave its first outlook on what it expects 2018 might have in store for oil markets. Its analysis suggests that high global oil stocks will continue despite the OPEC/non-OPEC cuts. “Our first outlook for 2018 makes sobering reading for those producers looking to restrain supply,” the IEA said. “In 2018, we expect non-OPEC production to grow by 1.5 MMb/d, which is slightly more than the expected increase in global demand.”
The IEA estimates that oil stocks have grown by 360,000 b/d so far in 2017 despite OPEC’s efforts to restrain production. The US is the main culprit, with crude production there expected to grow by around 400,000 b/d in 2017 and by nearly double that in 2018. US crude production averaged 9.3 MMb/d in the week ending 9 June, an increase of 900,000 b/d from the lows reached nearly a year earlier.
The latest analysis from Interfax Global Gas Analytics suggests that reduced disruption in global oil supplies is also taking its toll.
“The reductions in supply disruptions from Nigeria and Libya have caught the attention of market participants,” Interfax Global Gas Analytics said in its latest monthly report, published on Wednesday. The report estimates that production outages in May 2017 averaged 520,000 b/d in Libya and 360,000 b/d in Nigeria – nearly half the level of outages seen at the same time last year in both countries. The publication lowered its forecasts for Brent crude oil in 2017 as a whole and 2018 by around $2/bbl, to $52.0/bbl and $56.1/bbl respectively.
Unsurprisingly, OPEC’s own analysis is more optimistic – albeit cautiously so – on when the market will rebalance. OPEC’s latest Monthly Oil Market Report says OECD oil stocks will continue to decline in H2 2017. “The decline seen in the overhang in OECD commercial oil inventories in the first four months of the year […] is expected to continue in the second half, supported by production adjustments by OPEC and participating non-OPEC producers,” it said. “These trends along with the steady decline in oil in floating storage, indicate that the rebalancing of the market is underway, but at a slower pace, given the changes in fundamentals since December, especially the shift in US supply from an expected contraction to positive growth.”