Crude: Fundamentals remain oversupplied
As we have seen so far the fundamentals remain well oversupplied as production from the United States in particular has continued to rise to record high levels even as rigs have declined. The Saudi comments in essence suggest that non-OPEC is still not significantly cutting production and maybe they are coming to the realization that their strategy is slowly becoming a failed strategy.
Even if we do eventually see some modest cuts in U.S. production during the second half of the year all that seems to have been accomplished so far is a significant amount of oil has moved from producers into inventory. Crude oil inventories in the United States are at record high levels. This pattern will continue as long as oil prices remains around current levels and the forward curve contango for WTI remains wide enough to economically justify new storage trades.
In addition U.S. production is very price sensitive on the upside as it is on the downside. As prices stabilize and start to recover on a sustainable basis US production will increase at a stronger rate than it is right now and OPEC will still be faced with a challenge to their market share. Nothing has been done to result in non-OPEC crude oil being permanently shut-in. Capex cuts just postpone when new oil projects will flow.
I am of the view that this has been a failed strategy on the part of Saudi Arabia and there will be no announcement that the strategy is ending as that would be embarrassing for Saudi Arabia and OPEC. Rather I would expect to slowly see Saudi Arabia and other OPEC countries figure out where there production best fits in the changing global oil market and if they have to lose some market share so be it. As I have said many times oil prices will not enter into a sustainable recovery rally until OPEC does in fact start to cut production.
Tuesday's API report was mixed but overall only slightly bearish compared to the expectations. Crude oil inventories built less than expected with a surprise build in gasoline and a smaller decline in distillate fuel even with a round of cold weather along the U.S. east coast. Crude oil stocks increased less than the industry expectation for a larger build while inventories of distillate fuel stocks decreased less than the expectations after a cold blast hit the U.S. East Coast last week.