Crude recovery watch: Mixed picture in inventories

February 18, 2015 08:05 AM
Weekly Energy Analysis

What has been happening with the forward curve is consistent with a rising market and a view that demand will overtake supply. That said in the short term supply is still strongly outstripping demand suggesting that the narrowing of the contango could be a divergence in the market and a further indication as to the fragility of the current recovery rally.

As I have discussed several times in the newsletter nothing has significantly changed insofar as the overall global supply and demand balances are concerned. The prime driver supporting the current bullish market sentiment is the decline in US rig counts indicating that US production may decline in the future even though it is still increasing as of now. Last week the EIA reported another new record high production level of 9.226 million bpd. In fact with drilling productivity continuing to increase it suggests that a decline in rigs deployed may not result in a reduction in crude oil production or if anything it may be a minimal cut. I understand that there may be a lag time before the decline in rigs turns into cuts in production but rigs have been declining since early October or for over 4 months and production is still rising.

Also keep in mind the higher oil prices go the more bearish that is for the market. The higher oil prices go the more likely that U.S. shale producers in particular may not cut production. At current price levels some of the production that was unprofitable just a few weeks ago is now starting to show a positive ROI.

In my view I do not think Saudi Arabia/OPEC’s market share strategy has been very successful. Primarily the main outcome so far has been a massive reduction in oil prices with supply still strongly outstripping demand. There have been some issues with a few international supplies… Libya and Iraq to offset some of the surplus. But neither of these has anything to do with the OPEC strategy. However, the Iraqi supply reduction in January was weather related and will be a return to normal in the short term. Libya has been in chaos for over a year with production sketchy… so this is not new.

We are in the fourth month since OPEC’s decision and so far not much has changed. I still remain of the view that for oil prices to recovery more of its losses it will have to be supported by an OPEC cut. I think the fact that prices have risen during the recovery rally are giving OPEC a false sense of security as I also believe the current rally is fragile at best.

Global Equities were higher across the board over the last twenty four hours. The EMI Global Equity Index increased by 1 percent with the year to date gain widening to 3.9 percent. All ten bourses in the Index remain in positive territory for 2015 with the US and Brazil on the bottom of the leader board but positive for the year to date while Paris remains at the top of the leader board. Global equities have been a positive price driver for the oil complex over the last twenty four hours.

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