Crude prices subdued as waning investor confidence bites – IEA

LONDON (ICIS)–OPEC’s crude oil output cuts decreased in June while Libya and Nigeria increased their own production, prompting investors to turn bearish on the back of waning confidence about increasing prices, the International Energy Agency (IEA) said on Thursday.

OPEC’s rate of compliance with the 1.2m bbl/day crude output cuts agreed in November 2016 decreased in June to 78%, compared 95% in May, as the cartel’s members Libya and Nigeria, which are exempt from the agreement, increased their output by more than 700,000 bbl/day during June.

Stronger rates of compliance were observed among the non-OPEC producers who also agreed to output cuts in 2016, led by Russia, which rose to 82%  among these 11 countries in June, according to IEA.

However, the main objective from the output cuts – to increase crude oil values – remains elusive, with investors slashing their positions in crude futures from the end of May to the end of June by more than 200m bbl to 312m bbl.

“This month, there are two hitches,” said the IEA. “A dramatic recovery in oil production from Libya and Nigeria and a lower rate of compliance by OPEC with its output agreement.”

Crude prices are currently lower than when the OPEC cuts were officially announced in November. On Wednesday morning, the international reference Brent was trading at $47.47/bbl, while the US reference crude West Texas Intermediate (WTI) was trading at $45.48/bbl.

The day OPEC signed its agreement in November 2016, prices closed trading at $50.47/bbl for Brent and at $49.44/bbl for WTI.

“This [investors slashing their positions] was the lowest net long position recorded since January 2016 and June was the fourth straight month of falls in net long positions since a record bullish position was achieved in February in the euphoria following the output agreements,” said the IEA.

“The widespread interpretation of this is that investors believe, perhaps impatiently, that oil market re-balancing is taking too long with some calling for additional action by producers to speed up the process.”

However, the IEA said the output cuts should be looked at in the wider perspective of the period through to when the agreement expires in March 2018, and not just by one month’s performance.

The Paris-based agency spoke, however, of the “frustration” for OPEC members complying with the cuts when they see two of its members, Libya and Nigeria, pump oil to levels that dilute by two-thirds the 1.2m bbl/day cuts being targeted elsewhere.

The IEA said it remains to be seen how subdued crude prices will affect production in the US, where output has boomed for the most part this year, albeit with a deceleration in June.

“Financial data suggests that while output might be gushing, profits are not and recent press reports quoted leading company executives saying that oil prices need to be around $50/bbl to maintain production growth,” said the agency.

“WTI values have not been consistently above that level since late April. Meanwhile, we saw a record twenty-three consecutive weeks of rising drilling activity grind to a halt, although modest growth has resumed.”

However, the US shale sector resilience, the IEA went on to say, means that it would not be advisable to forecast a reduction in output, although the “recent exuberance” is currently being reined in.

Crude oil supply rose in June by 720,000 bbl/day to average 97.46m bbl/day on the back of increased production, while demand during the whole second quarter accelerated by 50% compared to the first quarter.

According to the IEA, the world’s demand rose during March-June to 1.5m bbl/day, up from the “lacklustre” first quarter’s demand at 1m bbl/day.

“For 2017 as a whole, demand is forecast to reach 98m bbl/day, with growth revised up by 100,000 bbl/day compared to last month’s [IEA’s Oil Market] Report to 1.4m bbl/day. Further growth of 1.4m bbl/day is foreseen for 2018, with global demand reaching 99.4m bbl/day.”

The IEA said in its June’s Oil Market Report crude demand would surpass the barrier of 100m bbl/day during the fourth quarter of 2018, although the year’s average will stand at 99.4m bbl/day according to the Agency’s forecasts.

While global crude oil stocks remain high, the IEA said that the current market balance implies a reduction in stocks of 700,000 bbl/day during the second quarter, which could indicate a rebalancing in the market.

“For now, actual stocks numbers do not support this picture but, at the time of writing, data for the quarter remains incomplete and, in any event, numbers for previous months can be revised,” it said.

“Thus, we need to wait a little longer to confirm if the process of re-balancing has actually started in 2Q17 [second quarter] and if the waning confidence shown by investors is justified or not.”

Pictured above: The Kern River oilfield in California’s Bakersfield, US
Source: Global Warming Images/REX/Shutterstock