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OPEC Column: Supply remains abundant, demand remains strong, but not strong enough

The agreed production cuts have certainly helped the market, but there’s a difference between help and rescue

American stockpiles declined by 237,000 barrels last week

A softening oil price near the end of the first quarter was not part of the grand plan. Supply remains abundant, demand remains strong, but perhaps not strong enough.

In early trading on Friday, Brent crude was priced above US$51 with WTI below the stronger psychological level of fifty dollars a barrel.

The agreed production cuts have certainly helped the market, but there’s a difference between help and rescue.

The market is impatient and wants to see all the promised cuts in place but implementation is taking a bit longer. American stockpiles declined by 237,000 barrels last week but more oil needs to be taken off the market to deliver a new sense of stability.

The Saudi Arabian minister of petroleum, Khalid Al Falih, was in the US this week where he continued to call for full compliance, reminding all players of the bigger picture for sustained economic growth.

In an interview with Bloomberg, Al Falih said he was satisfied the fundamentals were “strengthening.” He said it was “premature” mid-March to be deciding on the next move in terms of extending the production cuts but he added he was confident things were moving in the right direction.

Speaking after a high-level meeting with President Trump and Deputy Crown Prince Mohammed bin Salman, Al Falih said “energy is the lifeblood of the global economy” and emphasised that both nations were interested in a stable energy market.

He said he was glad that investment was coming back to the market and reaffirmed there was commitment to bringing the market into balance and said that OPEC’s actions will be the right move as “a stable oil price will ultimately benefit the United States”.

Both OPEC and the International Energy Agency released their annual reports this week with OPEC struggling to remain optimistic while the IEA predicted a fall in demand growth from 1.6mln barrels a day to 1.4mln for this year, with slowdowns seen in Japan, Germany, Korea and India.

OPEC sees slower growth in India, “now expected to see a slight deceleration, following a marginal downward revision to 7% in 2017”.

The monthly report noted that demand for OPEC crude in 2016 was 31.6mln barrels a day, some 1.9mln barrels a day higher than in the previous year.

“For 2017, demand for OPEC crude is projected at 32.4 mln barrels a day, around 0.7 mln barrels a day higher than in the current year.” The IEA noted that the agreed OPEC, non-OPEC production cut was working as committed, but raised concern about the dedication from non-OPEC players, adding “in 2017 non-OPEC output is set to rise 0.4 mln barrels a day to 58.1 mln barrels a day.” American output was at 9.11 mln barrels a day, the highest output since February last year.

The US Federal Reserve raised its interest rate by a quarter of a percentage point this week to a range of 0.75 to 1%. The market was expecting this move and the Fed said it was needed to curb increased inflationary pressures and to boost economic activity and growth. 

This is the third hike in 16 months, a sign of increased confidence coming back to the US economy. 

“The drive behind the rate hike is simple,” says Jason Schenker, president of Prestige Economics. 

“Inflation has been rising and the US economy is near full employment, equity markets are also up, despite the Fed rate hike in December and as such, the Fed had a green light to raise rates.”

Schenker also notes that “oil prices could remain supported by product inventory dynamics, which we believe are price bullish.”

Wherever the oil price goes in coming weeks, the oil market is impatiently waiting for more positive signs, as is OPEC and friends. The fundamentals need to be stronger, stocks need to be reduced and that much-awaited sense of stability needs to kick in sooner rather than later.

OPEC March 2017 Monthly Oil Market Report Podcast http://www.opec.org/opec_web/en/multimedia/351.htm


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