Oil outlook into OPEC, OPEC and Non-OPEC producers
ICE Brent has spent the past two weeks trading between US$45/bbl and US$50/bbl. Market direction continues to be dictated by news related to the potential output cut currently under discussion among OPEC members. Meanwhile in the US, the oil rig count has reached a nine-month high of 474, an increase of 158 from the lows seen in May 2016. US crude oil output has also slowly edged higher from the lows of 8.43MMbbls/d in July 2016 to 8.69MMbbls/d currently.
OPEC’s current stance During its 22 November meeting, OPEC members failed to reach an agreement on production cuts and, subsequently, the Saudis decided to abandon a planned meeting with non-OPEC producers. Since then, diplomatic efforts appear to have increased, but it seems a lot still needs to be sorted out if a final agreement is to be reached by the time the official OPEC meeting takes places on 30 November. On Sunday, Saudi Energy Minister Khalid Al-Falih said the “market will reach balance in 2017 even if there is no intervention by OPEC” and that “maintaining production at current levels is justifiable”.
Over the past two weeks, the US has added 25 rigs (22 oil rigs and 3 gas rigs), taking the total rig count to 592 (474 oil rigs and 118 gas rigs). From the lows seen in May 2016, 189 rigs have returned, highlighting a more optimistic view among industry players. A crude oil price at US$50/bbl makes economic sense for a number of producers in the US oil industry, with breakeven costs at c.US$40/bbl in the Permian fields – which have seen the majority of the returning rigs. Further, a Trump administration could see this increasing trend in the rig count continue, with the president-elect planning on easing regulations in the oil and gas industry. US crude oil output is also edging higher; the latest data shows US production at 8.69MMbbls/d, still some distance from peak production of c.9.6MMbbls/d in 2015, but up from the low of 8.43MMbbls/d seen in July this year. Withdrawals from floating storage According to Bloomberg data, global floating storage of crude oil fell 50MMbbls over the past two weeks to 150MMbbls from a recent high of c.200MMbbls. The Middle East saw a drawdown of 29MMbbls, while South East Asian inventory fell 12MMbbls over the same period. North West Europe and the USGC reported an inventory build of c.10MMbbls. Falling storage levels indicate rebalancing in the oil market. The upcoming winter and SPR building activity in Asia (both China and India) may have increased oil demand in the spot market (ahead of the OPEC meeting), pushing down floating inventories. New discoveries in the US Looking at the longer term, the USGS reported the discovery of the massive Wolfcamp shale formation in West Texas, the largest shale discovery so far in the US, with 20bn barrels of oil. Wolfcamp is nearly thrice the size of the Bakken shale formation in North Dakota. Oil fields in Texas are usually less costly to develop (due to available infrastructure and better yields).