Oil rebalancing dreams

Job Done! The oil market is rebalanced according to the Saudis (from Bloomberg):

OPEC and Russia won’t need to prolong output cuts beyond June because the agreed reductions will have already ended the oversupply in world crude markets, Saudi Minister of Energy and Industry Khalid Al-Falih said in Abu Dhabi on Monday.

Unfortunately for oil producers, the numbers don’t back up this view. There is an inventory surplus of around 300m barrels, and if the output cuts finish in June then this will have fallen to around 200m barrels, and will then start rising again:

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And these numbers assume the supply response from the US doesn’t continue and that the OPEC countries (and Russia) don’t cheat.

US Oil Production

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When OPEC announced the deal, they said that the cut could be extended for another six months. If OPEC (and Russia) are serious they will need to extend.

I’m wondering if this is going to end up in a binary outcome… Either:

  1. US Shale & non-OPEC countries don’t increase production any further, the oil price stays >$50. OPEC realise the strategy isn’t failing (which is different to the strategy working) and they extend the cuts by six months.
  2. US Shale & non-OPEC countries continue to increase production, the oil price drifts lower. OPEC realise that they are just giving market share to the US and so resume production. Open the oil price trapdoor…

At the moment option 2 looks more likely… US shale production is the statistic to watch.

Damien Klassen is Chief Investment Officer at the MB Fund launching in April 2017. Register your interest now (if you haven’t already):

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