Energy Prospectus

In its latest Short-Term Energy Outlook, the EIA said it sees U.S. crude output averaging 9.33 million b/d this year and 10.01 million b/d in 2018. The number of U.S. oil-directed active rigs fell as low as 316 in May 2016, but has since more than doubled to 733 rigs this month. Production in the Lower 48 states, which fell as low as 6.61 million b/d in September 2016, climbed to 7.01 million b/d in May and is now forecast to reach 7.8 million b/d by December 2018, according to the EIA. Production in the U.S. Gulf of Mexico waters, which dipped to 1.51 million b/d in September 2016, climbed to 1.74 million b/d in May and is forecast to hit 1.98 million b/d by the end of 2018. Alaskan production, which averaged 460,000 b/d in May, is expected to hold relatively steady through 2018, falling as low as 430,000 b/d and climbing as high as 510,000 b/ d, the EIA said.

U.S. crude oil production will, for the first time in nearly 50 years, climb to 10 million b/d by March 2018, the EIA said on 6/6/2017. Such a level would mark the highest daily U.S. production rate since November 1970, when production climbed to nearly 10.05 million b/d and averaged about 9.64 million b/d for that year, according to government data. The November 1970 figure remains the all-time high. "Increased drilling activity in U.S. tight oil basins, especially those located in Texas, is the main contributor to oil production growth, as the total number of active rigs drilling for oil in the U.S. has more than doubled over the past 12 months," Howard Gruenspecht, the EIA's acting administrator, said in a statement.

Scotiabank: Crude Oil Strategy
OPEC Is Not Cheating. They’re Right On Target.

OUR TAKE: Crude markets traded softly Tuesday coinciding with the OPEC Monthly Oil Market Report that showed production from the cartel grew m/m in May and that the time horizon for when they expect OECD inventories to decline toward five-year averages may be extended.

Additionally, some speculators believe that the reported supply may be evidence of cheating or damning of OPEC’s goal to cut barrels from the market ( Oil Price: OPEC Production Spikes – Has The Cheating Begun? or CNBC: OPEC oil production jumps in May despite cartel's output agreement as Iraq, Libya pump more ).

We have an entirely different take on the data. The group is on track to decrease OECD inventories to five-year averages as global balances are currently in a deficit and bolstered by seasonal demand growth that is expected to be ~2 mmbbl/d higher in the second half the year. Additionally, we have found little evidence of cheating; on the contrary, on-going compliance is quite high and should be lifting crude higher over time.

OPEC production is directly in line with or perhaps modestly below their target output. OPEC production remains 1,507 kbbld below Oct/16 high-watermark levels and 75 kbbld below their stated target of 29,804 kbbld, when excluding Libya and Nigeria (see Exhibits 1 & 2). As a reminder, Libya and Nigeria were exempt from the supply deal that aimed to have eleven of the thirteen OPEC members, plus Russia, Mexico, Kazakstan, Oman, and another half-dozen non-OPEC participants remove a total of ~1.8 mmbbld of supply from the market. If OPEC has reduced production by 1.5 mmbbld, the remaining non-OPEC members would need to contribute ~300 kbbld, of which Russia is estimated to be contributing this full amount (intentionally), while the remaining non-OPEC member’s supply is likely falling as well (unintentionally).

The global oil market is HUGE and it will take some time before inventories to reflect that demand currently exceeds supply. I know it would be wonderful if OPEC would announce a supply agreement and a few days later we saw clear evidence of it working. However, that is WAY TO SIMPLE.