Crude oil glut frustrates Opec’s price control moves
A balancing of the market is proving elusive amid a resurgent US shale industry
Opec’s efforts to raise oil prices by bringing a three-year-old glut to an end keep running into an uncomfortable fact — rival crude supplies are proving stronger than they ever feared.
In the past three weeks, since Opec, Russia and other producers agreed to extend oil supply cuts for another nine months, the price of Brent crude has fallen 13 per cent and is set to finish this week at the lowest level this year, near $47 a barrel.
While the countries involved in the deal — together representing more than 50 per cent of world oil output — have cut as much as 1.8m barrels a day of supplies from the market, their efforts just keep getting swamped.
The US shale industry has been resurgent in 2017 and is now expected to grow even faster next year. Oil stockpiles built up during the glut have been pulled from storage and demand, many traders believe, has not grown as quickly as many expected.
Other countries like Brazil are also seeing output rise after investments made before the price crash from above $100 a barrel in 2014.
“In Opec’s minds, they have made the cuts and the market should be patient while stocks come down,” said Gary Ross, head of oil at Pira Energy Group, a unit of S&P Global Platts.
“[But] even by the end of the year, it looks to us that there will still be 150m-200m barrels of surplus inventories.”
Opec and its allies are now essentially in a race against time to show they can mop up the excess.
After falling in 2015 and 2016, US shale oil production is tipped by the US Energy Information Administration to hit a record next month of 5.475m barrels a day — surpassing the peak hit two years ago before the full force of the price slump was felt.
The young industry has shown it can squeeze down costs and now compete when prices are near $50 a barrel.
The International Energy Agency this week said supplies from countries outside Opec, led by the US, would grow faster than demand next year, meaning the glut of oil stocks is unlikely to dissipate in 2018 without further intervention by Opec.
In the short term, Opec’s efforts as yet just do not seem to be working fast enough for many traders. Oil has started to be stored on supertankers sitting off key oil hubs — a sign of acute oversupply at a time when demand is normally strong.
At least 5m barrels of crude are being stored in the UK portion of the North Sea, according to satellite monitoring and data compiled by TankerTrackers.com, which measures shipments.
More tankers have also appeared off Singapore, a key hub for storing oil at sea during times of oversupply, as well as off producing countries in west Africa, which analysts at JBC Energy said was “a strong warning signal . . . during what should be peak refinery demand season”.
In an effort to curb the glut Saudi Arabia, Opec’s largest exporter and de facto leader, has indicated it will send less crude to the US, where timely government data mean stocks are more visible and therefore tend to have a larger impact on trader sentiment.
But analysts believe Opec also needs to curb supplies to Asia, the fastest growing region of global oil demand, to truly tighten the market — something many producers have been unwilling to do as they do not want to sacrifice customers in an expanding market.
In the meantime, traders will be watching to see if the growth in US shale starts to show signs of slowing. But even if drilling stops expanding, a quick drop in supplies is by no means guaranteed.
So-called drilled but uncompleted wells, known in the shale industry as DUCs, have also risen to a record level. These can be rapidly brought on if producers need a quick boost to cash flow, potentially keeping supply buoyant even if drilling slows.
“Pervasive doubts over the oil market rebalancing will linger without confirmation that the supply overhang is waning,” said analyst Stephen Brennock, at brokerage PVM in London.
“Until such conclusive proof emerges, all bets are off.”