OPEC over-delivers on cuts, sees US shale output surge

US shale production “defied forecasts”: Former Saudi oil official

With OPEC delivering higher crude cuts than the cartel had pledged last month and reports showing oil inventories falling in February, it appears the OPEC efforts to clear the oversupply of crude is succeeding.

But in its Monthly Oil Market Report, OPEC also raised its forecast for supplies from non-member countries in 2017 as higher oil prices jumpstart US shale production that had been dramatically impacted by low oil prices.

The increased US shale output also reduces demand for OPEC’s crude.

On Wednesday, oil prices fell slightly, trading at around $56/barrel, but are still up from this time last year when crude prices were in the $42/barrel range.

“Despite some downside risks, general expectations for demand growth for oil products in the coming months remain bullish,” said the OPEC report, which also made a minor upward revision to its global demand forecast for 2017.

“The return of refineries from seasonal maintenance and healthy demand, together with the high conformity observed in OPEC and non-OPEC production adjustments, should enhance market stability and reduce the volatility seen in recent weeks.”

In the MOMR, OPEC showed there was an increase in participating cartel members’ compliance with the supply cut deal along with a decrease in oil stocks in industrialized nations in February.  However, oil inventories are still 268 million barrels over the five-year average.

In March, supply from the 11 OPEC members with production targets fell to 29.761 million b/d, according to secondary sources used by OPEC to monitor output.

According to Reuters, OPEC complied 104 per cent with the supply cut.

While the OPEC supply cut has been successful, supply growth from oil producers outside the cartel in 2017 rose by 580,000 b/d as increasing oil prices help boost US shale production.

“With the pick-up in drilling activity, as well as increasing cashflows in the tight oil industry, U.S. tight crude (shale) output is expected to rise quickly and increase 335,000 b/d for the overall of 2017,” OPEC said.

According to OPEC, its production, including Nigeria and Libya who are excluded from the supply pact, fell about 150,000 b/d in March to 31.93 million b/d.  Saudi Arabia made a larger cut that it had pledged.

OPEC secondary sources said Saudi output rose in March to 9.994 million b/d, Saudi Arabia reported to OPEC that its production fell to 9.90 million b/d.  Both figures are well below the country’s output target.

With increasing output from outside producers, OPEC reduced its forecast demand for its crude to 32.22 million b/d in 2017, 130,000 less than last month, but more than current production, which suggests stocks will drop if output does not rise.

A rise in non-OPEC supply could depress prices and hinder the cartel’s efforts to clear the crude oversupply, but OPEC officials are confident the market can deal with US shale growth.

“Shale oil production has defied forecasts in the past and its economics are still improving and evolving,” former Saudi oil official Ibrahim al-Muhanna said in a speech.

“However, with all the importance and media attention given to it, shale oil is not a primary source of energy.”

OPEC is scheduled to meet on May 25 in Vienna where members will discuss extending the supply cut deal beyond June.  So far, a number of members, including Saudi Arabia and Kuwait are in favor of the extension, providing non-OPEC members participating in the pact are on board.