Not much excitement over oil market rebalancing

Higher cost: A file picture showing an oil pump in operation in the Permian Basin in the US. The cash operating costs of major shale producers have been inching up over the past few months. — Bloomberg

NEWS that the oil market is starting to rebalance has not stirred much excitement and price expectations remain modest.

While US$50 per barrel for US crude or West Texas Intermediate (WTI) is considered a psychological barrier, the market is waiting for more data on oil inventory and possible extension of production cuts.

At this juncture, “there is solid evidence of draw-downs in the Organisation for Economic Cooperation and Economic Development (OECD) commercial inventory as inventory days have fallen from its peak, which indicates a more balanced crude oil market,’’ said Thomas Yong, CEO, Fortress Capital.

Supporting an oil price recovery scenario will be consumption growth keeping pace, and the commitment to extend production cuts until the first quarter of next year, said Yong.

In the wake of a supply glut and depressed oil prices, the Organisation of Petroleum Exporting Countries (Opec) and other producers including Russia, Mexico and Kazakhstan had pledged to reduce output by about 1.8 million barrels a day.

The deal, reached in late 2016, was initially for a six-month period, and later extended by another nine months until the end of March next year.

Despite the cuts, oil prices have struggled to break above US$50 a barrel after being weighed down by the resurgence of US shale production, noted Bloomberg.

“For the past few months, US shale drilling productivity gains have stalled, especially in the heavyweight Permian Basin.

“As a result, the cash operating costs of major shale producers have been inching up, and an oil price above US$50 per barrel is required for them to remain profitable,’’ said Yong. As a result of production declines and stronger demand, global oil stocks are beginning to rebalance, said Reuters, quoting the International Energy Agency (IEA).

“OECD commercial stocks were unchanged in July at 3.016 billion barrels, when they normally increase. OECD product stocks were only 35 million barrels above the five-year average at end-July.

“Depending on the pace of recovery for the US refining industry post-Harvey, very soon, OECD product stocks could fall to, or even below, the five-year level,’’ the IEA was quoted as saying.

“The progress made in the rebalancing of the oil market, if sustainable and supported by improving global demand, should help support the price of oil.

“It must be noted, however, that the devastating hurricanes has a knock-on effect on production, and the eventual restoration of supply disruption may take some pressure off the price,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.

In fact, the IEA which coordinates the energy policies of industrial nations, has raised its 2017 global oil demand growth estimate to 1.6 million barrels per day (bpd) from 1.5 million bpd.

Due to robust demand in industrialised countries, global demand for oil grew by 2.3 million bpd in the second quarter, the highest quarterly year-on-year increase since mid-2015, said Reuters.

Meanwhile, global oil output fell by 0.72 million bpd last month, due to unplanned outages and scheduled maintenance in Opec member Libya, as well as non-Opec countries such as Russia, Kazakhstan, Azerbaijan, Mexico and in the North Sea.

The 12 Opec members raised their compliance to 82% last month from 75% in July, and so far, their compliance for the year stood at 86%. “Ultimately, it is the fundamental supply and demand equation that will dictate the direction of oil price over the medium term. Opec members should stick to their commitments for output cuts till March next year,’’ said Lee.

“Based on recent bets made by investors, expectations are that markets are tightening and that prices will rise, albeit very modestly,” the IEA was quoted as saying.

“I still expect Brent oil to hover between US$45 to US$55 per barrel, barring any unexpected events or major news that can move the price.

“Events like geopolitics and natural disasters will spark the price but reduction in demand due to technological improvements, for example, the advent of electric cars, will pull the price down,’’ said Danny Wong, CEO, Areca Capital.

Brent oil has climbed more than US$10 a barrel over the past three months and is close to where it was at the beginning of the year, roughly trading between US$55 and US$57 a barrel, said Reuters.

Opec and its allies are now discussing a further rollover of the production cuts ahead of a ministerial meeting scheduled for late November in Vienna, with a three-month extension seen as the minimum, said Bloomberg.

Factors considered will be the level of compliance with agreed cuts by Opec and its allies, the pace of the oil output recovery in Libya and Nigeria, US shale supply and global demand.

Columnist Yap Leng Kuen notes the risk of prices propped up by cartels.