Over the last month, oil prices initially stayed between $ 55-57 (Brent) and $ 51-53 (WTI). Prices went up to a high of $ 57.31 (Brent) / $ 54.40 (WTI), in response to news relating to effective compliance with production cuts by OPEC and non-OPEC members (90% compliance, the best in OPEC history) and possible extension of the production agreement beyond 30 June.
However, from 11 March, prices started coming down: they briefly touched $ 50.85 (Brent) on 13 March, before closing at $ 51.41 (Brent)/ $ 48.44 (WTI); prices have thus gone down over 8 percent since the decision to effect production cuts was announced in November last year.
These price declines are in response to reports that global inventories were higher than expected: there has been a surge in US inventories, which rose by 8.2 million barrels to a record 528.4 million barrels in the second week of March, the ninth continuous weekly rise. This is 20 percent more than the average of last five years, and 30 percent compared with the 2010-14 period. Other factors putting pressure on prices are high production levels in Nigeria and Libya, which are not included in the production cut agreement, and high stockpiles in China, reported to be 30 million barrels last month.
Besides high US stockpiles, there is news that more rigs for US shale oil production were being deployed in response to prices remaining above $ 50. US companies are said to have added 77 rigs this year to 24 February, reaching 617 rigs in place, the highest level since September 2016. US production is now forecast to reach 4.87 mbd in March, the highest level since May 2016. US shale producers are being described as “fitter, leaner and faster versions” as compared to the earlier companies, many of which closed when prices began to collapse in mid-2014, and are comfortable with prices above $ 50.
These developments have focused attention on whether the OPEC/ non-OPEC production cut would continue beyond June. The Saudi energy minister has said that OPEC would take a decision on this at its ministerial meeting in May based on production cut compliance and whether inventories had declined. As of now, some analysts are projecting prices in the range of $ 45-47 in coming months. This is expected to put pressure on producers to extend production cuts after the June deadline.
For the medium term, Merrill Lynch projected average prices of between $ 50-70 through to 2022, slightly below its earlier estimates of $ 55-75. The company also estimated that global oil consumption would expand at 1.1 mbd per annum, with demand driven mainly by emerging markets. In the period 2017-22, Merrill Lynch forecast non-OPEC production growth to be an average of 830,000 b/d annually, with 80% of the rise coming from the US.
March 19, 2017