Oil Prices Mixed on Growing Demand Outlook

Oil Prices Mixed on Growing Demand Outlook

Looking at WTI, prices fell from $61.35 at the start of the day yesterday down to $60.70 today.

Oil prices held steady on Thursday, supported by healthy global demand but capped by the relentless rise in U.S. production that is undermining efforts led by producer cartel Opec to cut supplies and prop up markets.

It said oil prices have firmed up since OPEC's November 2016 agreement to cut oil production by 1.2 million barrels per day (bpd) and non-OPEC members, led by Russian Federation, also agreed to cut production by 558,000 bpd.

That was the fourth consecutive rise from 870,000 bpd forecast in November.

All this points to American crude output exceeding expectations in output terms; within OPEC, Iran is lobbying to keep oil prices at US$60, fearing that a US$70/b target will only encourage additional USA shale output.

But the trend in de-stocking remains in the right direction with the IEA saying that the January rise in stocks was half the average monthly stock rise seen over the previous five years. The effects of the production cuts of 1.2 mb/d (plus almost 0.6 mb/d from Russian Federation and other minor partners) had little effect in early 2017, likely because of the ramp up in production and exports just prior to the implementation of the deal. They have extended the pact until the end of 2018.

OPEC's attempts to underpin crude oil prices are being undermined by the USA oil industry.

But it has also encouraged a flood of shale, fuelling a debate about the effectiveness of keeping the curbs in place. A broader market slump initially drove prices lower, while surging American production and increasing inventories remain a challenge. To 2020, production increases from non-OPEC countries are by themselves enough to meet demand growth.

Brent crude oil futures were up 25 cents, or 0.4 percent, to settle at $64.89 per barrel.

The West Texas Intermediate (WTI) for April delivery was up 0.25 USA dollar to settle at 60.96 dollars a barrel on the New York Mercantile Exchange, while Brent crude for May delivery added 0.25 dollar to close at 64.89 dollars a barrel on the London ICE Futures Exchange.

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Indeed, the recognition that US shale is going to grow more than expected likely means that OPEC realizes it will need to keep the cuts in place longer than it had planned.

The International Energy Agency and the EIA have both recently revised their USA oil production forecasts higher.

Iran produced 3.83 million b/d in February, just above its quota under the OPEC production cut agreement of 3.80 million b/d, according to the latest Platts survey.

But since Opec expects demand this year to grow by only 1.62-million barrels a day, that would leave the market slightly oversupplied and may require more or longer supply restraint. Distillate inventories fell by 4.36 million barrels to the lowest level since December.

Oil may also soon get some support from seasonal demand. The move could have implications for USA sanctions on Iran, which could impact the latter's oil industry and exports, Facts Global Energy and Royal Bank of Canada warned.

Analysts polled by S&P Global Platts expected a 2.5 million-barrel increase in crude stockpiles.

By 2023, oil demand will reach 104.7 mbpd, up 6.9 mbpd from 2018.

The report notes, "Over the next three years, gains from the United States alone will cover 80 percent of the world's demand growth".

Restraint shown by U.S. producers supports Goldman Sachs Group Inc's bullish oil view, the bank said in a report.

"Strong demand growth will further draw down inventories as we enter the second quarter and the summer driving season" begins, said Neil Beveridge, a senior analyst at Sanford C. Bernstein & Co.

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