OPEC Will Soon Find Out Whether Their 1.8 MMBPD Production Cut Was A Good Or Bad Idea

Witawat (Ed) Wijaranakula, Ph.D.
Fri Apr 14, 2017

The WTI crude futures May '17 gained just 1.24% for the week, closing at $52.89 per barrel on Thursday, while the Brent oil futures June '17 was up only 0.72% for the week to close at $55.64 per barrel, despite a bullish EIA weekly report. Traders turned quickly bearish after a Reuters report on Wednesday said that storage at Cushing, Oklahoma, the largest oil storage facility in the world, may be near the capacity at which operational efficiency starts to be compromised. Technically, the WTI crude price was rejected at $53.96 per barrel, or the 76.4% Fibonacci retracement level, and could pull back further to retest the trendline support at about the $50 level.

Crude oil prices began to move higher on Monday, following a Reuters report saying that Libya's Sharara oilfield was shut on Sunday after a group blocked a pipeline linking it to an oil terminal. Reuters also reported on Wednesday that Saudi Arabia has been pushing OPEC and non-OPEC members to extend production cuts beyond June.

Goldman Sachs seems to be all over the place with its crude price forecasts, as they sent out a research note on Wednesday that the firm anticipates a return to long-term oil price stability at $50 per barrel, according to CNBC. Last week, Goldman said in a research note that with global demand exceeding supply, they are "constructive" on oil prices, at least in the short term. The firm then said, "We project WTI will increase from $50/bbl to $57.50/bbl by mid-year and average of $55/bbl in the second half of 2017", according to Barrons.

The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies decreased by 2.17 million barrels to 535.38 million barrels, excluding the Strategic Petroleum Reserve, in the week ending April 7, compared to the S&P Global Platts forecast for a build of 0.125 million barrels. The American Petroleum Institute, or API, inventory data on Tuesday showed a U.S. crude inventory decline of 1.3 million barrels.

Separately, the EIA said the weekly U.S. crude oil production increased 36,000 barrels per day, or bpd, for the week ending April 7, to 9.235 million bpd. U.S. crude oil output increased 101,000 bpd to an average of 9.235 million bpd in April, compared to a March average of 9.134 million bpd. Output has fallen less than 4% from the peak level of 9.60 million bpd in June 2015. Houston-based oilfield services company Baker Hughes Inc. said on Thursday that the U.S. oil rig count rose another 11 to 683, compared to 316, when the rig count hit the low on June 6, 2016.

Since the beginning of this year, the U.S. crude oil production has increased by about 470,000 bpd, or 26.2% of the 1.8 million bpd output cut announced by OPEC and non-OPEC producers in December. The latest EIA data shows that U.S. exports of crude oil and petroleum products surged 16.7% year-on-year to 5.69 million bpd in January, while imports were also up 9.9% year-on-year to 10.7 million bpd. The U.S. net consumption of crude oil and petroleum products, on the other hand, was down 1.04% in January on a year-on-year basis, to 13.82 million bpd. 

According to The Telegraph, OPEC is betting big on a strong U.S. summer driving season this year to drain the remaining glut of oil supplies. OPEC and non-OPEC producers may then want to keep a close eye on the U.S. net imports and consumption, as the data might give some clues whether their 1.8 million bpd production cut was a good idea, or bad idea.


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