Global Oil Market - May 30

[dan_s]

Reuters reported on 5/25/2017 that OPEC had decided to extend cuts in oil output by nine months to March 2018 as it battles a global glut of crude after seeing prices halve and revenues drop sharply in the past three years. "We considered various scenarios, from six to nine to 12 months, and we even considered options for a higher cut. But all indications discovered that a nine-month extension is the optimum," Saudi Energy Minister Khalid al-Falih said. Falih said OPEC members Nigeria and Libya would still be excluded from cuts as their output remained curbed by unrest. He also said Saudi oil exports were set to decline steeply from June, thus helping to speed up market rebalancing. He added that cuts could be extended further when OPEC and non-OPEC producers next meet in Vienna on Nov. 30. < Most reports that I've seen up to now express the view that OPEC will not extend the production limits beyond 3/31/2018. I disagree with that assumption. OPEC is only relevant if they act as the "swing producer", plus they can not afford another price war. - Dan

The market reaction was a classic case of “buy the rumor, sell the news,” WTI crude oil rose during the week of 5/15, from $47.75/bbl to $50.53/bbl. Then, after the agreement was announced, WTI moved several dollars lower to close at $48.18/bbl on 5/26/2017. Markets were better on Monday, 5/29/2017, with WTI paring some of last week's losses and closing at $50.01/bbl. Trading was light due to public holidays in China, the United States and Britain.

Geopolitical risks were heightened over the weekend, as Reuters reported that Egypt made clear on 5/29/2017 that it planned to press ahead with air strikes against Islamist militants in neighboring Libya who it says were responsible for killing Egyptian Christians in an ambush last week. Libyan military commanders said Egyptian jets hit the Libyan city of Derna on Monday, continuing attacks that began hours after masked men boarded vehicles driving dozens of people to a monastery in the southern Egyptian province of Minya on Friday and killed 29.

Elsewhere in the region, defeated hardline candidate Ebrahim Raisi has complained of voter fraud in Iran's presidential election and called on the judiciary and the election watchdog to investigate, the semi-official Fars news agency said, as further reported by Reuters on 5/29/2017. The allegations, likely to stoke up Raisi's conservative supporters, were among his strongest since losing the bitterly contested May 19 vote to incumbent Hassan Rouhani by a margin of 57% to 38%.

[dan_s]

Oil analysts expect that with the OPEC extension finalized, the drawdown in crude oil inventories will accelerate this year. The U.S. has already seen a drop off in storage, but the weekly declines could grow larger. Some traders, according to Reuters, predict that the drawdowns could jump as high as 10 million barrels per week, while those that are more cautious suggest declines on the order of 3 to 4 million barrels. “I think we'll easily get below 500 million barrels over the next six to eight weeks, or eight to 10 to be conservative,” Andrew Lebow, senior partner at Commodity Research Group, told Reuters. That would be down from the record high of 533 million barrels hit in March.

U.S. crude oil inventory was 516,340,000 barrels on May 19th. We should see it drop below 500 million by the end of June. U.S. crude stock should drop sharply in Q3. Rate of decline will slow in Q4. My SWAG is that U.S. crude oil inventory is under 440 million by year-end.

Read: http://www.reuters.com/article/us-opec- ... SKBN18L2Q1