The anticipation is already building for OPEC’s much awaited summer meeting.
After a volatile week on the markets, we’re seeing signs of optimism rebound.
In early trading on Friday, Brent crude was priced above US$53 a barrel with WTI holding close to US$50 a barrel.
Investors have been selling off commodities in recent weeks as they focus on high inventory figures and a lack of market moving news.
Current OPEC deal is winding down
The current OPEC, non-OPEC six-month production deal to take 1.8 million barrels a day off the market, is winding down, but looks sure to be re-ignited when OPEC ministers meet with their non-OPEC colleagues in Vienna next Thursday.
The approving signals from Saudi Arabia and Russia have encouraged more positivity in the market, but many analysts remain nervous as there’s still oversupply on the market.
Capital Economics said in a note this week, “that traders are reading too much into this situation” and fears they are being too optimistic.
“The current production cut has not been able to produce substantial results so far in terms of limiting the glut, so extending the cut into 2018 may not have a big enough impact.”
Oil inventories are the big focus
The big focus seems to be on global oil inventories that remain above the 5-year average.
Storage costs have come down and while prices and demand remain stagnant, oil supply remains high.
US production has also increased and will continue to do so, especially if additional cuts help boost the price.
Shale production is on the rise
Shale production is on the increase this year with total US production currently above 9 million barrels a day.
IHS Markit estimates that new wells are producing at twice the productivity levels they once did with the new breakeven price for shale drilling now US$43-$45 a barrel.
Morgan Stanley says that the doubling of the rig count in the US demonstrates the “strongest recovery in the last 30 years.”
While judging inventory levels is always a good indication of the state of the market, independent macro-economist and energy expert, Cornelia Meyer believes we are putting unnecessary emphasis on stocks and she says we should be looking at the bigger macro trends.
Markets should be balancing in the second half
“OPEC, the IEA and the US Energy Information Administration all agree that markets should be balancing within the second half of the year.”
Meyer is optimistic that demand will drive the market in the months to come.
“Production may increase by more than the 500,000 barrels a day which was the April consensus estimate. Still, we shall see demand growth of around 1.3 million barrels a day outpace supply growth by at least 500,000 barrels a day.”
American stocks are always in focus, but Meyer says the market needs to look further afield.
“We also need to look at inventories in China, although Chinese inventory data does lack some transparency, along with those of Iran, the Gulf and India.”
She says the world oil market is “more complex than one data point alone” and encourages a sense of calm “when looking at first-quarter stock levels in the US, given this time of year is when we have historically seen inventories build, as refineries go into their maintenance schedules.”
A busy week ahead for OPEC
OPEC officials have a busy week ahead as ministers, analysts and journalists converge on Vienna in anticipation of an important meeting.
OPEC’s Economic Commission Board will be considering all options while ministers engage in last minute diplomacy in advance of Thursday’s gathering.
For full coverage of all proceedings in Vienna at OPEC’s 172nd meeting – log into www.opec.org for live webcast from 0900 Central European Time on Thursday 25th May 2017.