The middle of the year is never the best time to gauge oil prices, but the market had hoped to see a more positive direction with stronger indicators for better performance for the rest of the year.
A decline of 20% the beginning of the year raises the likelihood of a bear market and in early trading on Friday, Brent crude was holding above US$45 with WTI above US$42 a barrel.
While the oversupply of crude continues to weigh on the market, the good news is the strength of compliance by OPEC and supporting countries to agreed production cuts.
The Joint OPEC-Non-OPEC ministerial monitoring committee reviewed the numbers for May and found that it “recorded the highest conformity ever with their voluntary adjustments in production, achieving a level of 106%.”
The agreed combined adjustments of 1.8mln barrels a day have done much to help rebalance the market, but traders fear not enough as the sell-off continues. OPEC officials remain more optimistic saying “this is a convincing demonstration of the willingness of all participating countries to continue their cooperation until the set goal is achieved.”
Full compliance encouraged
The head of the committee, Kuwait’s Oil Minister Issam Almarzooq encouraged full compliance “to help the agreement succeed.” The next monitoring committee meeting will be held in Russia late in July.
Oil production in the US continues to grow despite the second weekly decline in crude stockpiles. The Energy Information Administration showed a weekly increase in US production of 20,000 barrels to 9.35mln barrels a day. Inventories declined by 2.45mln barrels and gasoline stocks were down by 578,000 barrels. This unexpected rise in US production will have OPEC producers concerned.
Already the energy minister from Iran, Bijan Zanganeh is questioning if OPEC needs to cut more, according to a statement from the state IRIB news agency. The minister also added that this will not be an easy decision and that OPEC needs to “wait a while and see how the market will form.”
The market is also seeing additional supply from Nigeria and Libya. Both countries as well as Iran, are exempt from the OPEC agreement while they resolve domestic economic and production issues.
An official from Libya’s national oil company says production is at its highest in four years, currently estimated to be 885,000 barrels a day with talk of a possible million barrels a day by the end of July. Libya’s light sweet crude is in great demand globally with much of this oil been off the market since the 2011 revolution. Last month the national oil company said it hoped to reach 1.32 million barrels a day by the end of this year.
Fundamentals out of balance
While the fundamentals remain out of balance, commodities economist, Simona Gambarini from Capital Economics says it’s not necessarily the beginning of a bear market.
The main commodity indices have certainly moved lower this year “but the headline figures mask very diverse underlying price movements.” Gambarini also says, “that the macroeconomic backdrop for commodities contains some positives, including stronger global growth, and some negatives, such as China’s economic slowdown.”
Lack of growth
Chinese growth or lack thereof will certainly dampen industrial production and demand, but stronger signs of growth around the world look sustainable in the coming years.
In the short term, some US production will be stalled this weekend as facilities along the southern coast brace themselves for tropical storm Cindy. It’s estimated that about one-sixth of production is already shut in, but the region is used to seasonal tropical storms and no doubt it’ll be business as usual in the Gulf once this storm passes.