Is OPEC starting to cheat? As analysts cut their price estimates for this year and next, the International Energy Agency has suggested some cartel members had “opened the taps” in June as showed some members lifting output last month.
If there is cheating, then oil prices will come under more pressure.
The IEA said that global oil supply rose by 720,000 barrels a day in June as Nigeria, Libya, plus Saudi Arabia raised output.
Compliance with the OPEC production cap (calling for a cut of 1.8 million barrels a day until March next year) deal dropped to 78% in June, the Agency said.
While it’s been well known that Nigeria and Libya (which are exempt from OPEC cap), higher output from OPEC’s Saudi Arabia has raised eyebrows.
Saudi Arabia cut supplies by more than required in OPEC’s deal with non-members including Russia in the early months of this year, keeping total compliance above 100% even as some other countries kept their production levels higher than expected.
While the IEA said Saudi production was still within its target, traders and analysts have suggested the group may need to cut further as prices have floundered. “Each month something seems to come along to raise doubts about the pace of the rebalancing process,” the Paris-based IEA said.
OPEC already faces a struggle to reverse the oil glut as the US shale industry boost production to close to 9.4 million barrels a day (b/d, last week), up close to 700,000 barrels a day.
While prices surged in late 2016 and early this year, they have lost ground in the past four months are and down 15% to 17%.
The IEA reckons strengthening demand (estimated at an extra 1.4 million b/d this year and next) will give some help in cutting oversupply in the next six months or so.
The IEA revised its demand forecast up marginally from June but rising output from non-OPEC countries and some OPEC members is raising doubts about the sustainability of the cap.
“Such is the resilience of the US shale sector that we should be careful to pronounce that its expansion will slow, however it could be that the recent exuberance is being reined in,” the IEA said.
The agency forecast non-OPEC supply would grow by a combined 2.1 million b/d over 2017 and 2018, led by the US. The IEA said inventories in developed countries have fallen – down to 266 million barrels above the five year average from 300 million barrels in April.
Meanwhile BNP Paribas, Morgan Stanley, Barclays and the US Energy information Administration (EIA), have all cut their 2017 and 2018 oil prices estimates. But at the same time the IEA warned that the current weak price for oil will eventually force a slow down in US production.
But the EIA still sees US production still hitting a record in 2018 of 9.90 million barrels a day, down from the previous June forecast of 10.01 million barrels a day. The agency added that would still “mark the highest annual average production in U.S. history.”
It left its 2017 forecast unchanged on 9.33 million barrels a day, where US production currently sits.
“A lower forecast for crude oil prices is expected to shave a little off projected growth in U.S. oil production next year compared with the previous forecast, but annual output is still on track to reach a record high in 2018,” Howard Gruenspecht, acting administrator at the EIA, said in a statement.
“A revised oil price forecast that is $2 to $4 per barrel lower for late 2017 and during 2018 than the prior forecast will make it less profitable for some U.S. producers to drill for oil,” he said.
Still, America will still account for almost 90% of the increase in global production of crude oil and other liquid fuels by non-OPEC countries in 2018,” said Gruenspecht.
On an annual basis, US crude production peaked at 9.64 million barrels a day in 1970.
In its monthly energy outlook report, the government agency forecast West Texas Intermediate (WTI) prices at $US48.95 a barrel for this year, down 3.6% from its June forecast. For 2018, it forecast $US49.58—down 7.5% from the previous outlook.
The EIA also cut its 2017 forecast on Brent crude by 3.6% to $US50.79 and its 2018 outlook by 7.2% to $US51.58.
BNP Paribas meanwhile cut its Brent forecast for 2017 by $US9 to $US51 per barrel, and has dropped its 2017 forecast for West Texas Intermediate by $US8 to $US49 per barrel.
The revisions for 2018 are even sharper – $US15 off its Brent forecast to $US48 a barrel and $US16 to $US45 a barrel.
BNP Paribas said in a report that higher production from countries outside the OPEC production cap (The US and OPEC members, Nigeria and Libya) are producing more oil than the cap cuts. And Barclays is also gloomy – their analysts say forget oil prices moving back above $US50 a barrel this northern summer.
In the report the bank cut its third quarter Brent oil forecast to $US49 a barrel, down from a previous forecast of $US57. For West Texas Intermediate Barclay analysts see prices trading around $US47 for the quarter, down from around $US55.
“The recent weakness reflects the market’s need to price in a lower [U.S.] shale break-even and absorb the unexpected return of around 300-400 [kilobarrels a day] of Libyan and Nigerian oil,” they said in the report.
And the International Energy Agency (IEA) said in a report that investment in US shale projects are forecast to rise 53% this year as producers have been able to break even at lower prices because of efficiency gains and cost improvements.
“Even if they disappoint their balance-of-the-year targets, they are still likely to show the double-digit percentage growth rates,” the Barclays analysts said, referring to the American shale producers.
“With inventories still quite high, government stockpiles available, DUCs standing ready, and cuts providing OPEC with additional spare capacity, there are plenty of plugs to fill any hole,” they added. DUC is shorthand for drilled, but uncompleted wells.
The analysts poured cold water on any hopes of significantly higher oil prices in the longer term. They now see Brent around $US55 a barrel in 2020, down from their previous forecast of $US82, as the market fully comes to terms with the new era of shale oil. .
And Morgan Stanley last week cut its 2017 Brent forecast to $US50.50 from $US57.50 and its WTI forecast to $US48 from $US55, arguing that the OPEC cap won’t rebalance the overall market
But there’s a lone bull. UBS commodity analyst Giovanni Staunovo said last week that Brent could rally to $US60 a barrel by the end of this year, partly because he sees a chance US production will be weaker than everyone expects.
