Crude oil prices edged higher on the first week of 2017. Yet, the choppy trading pattern signaled doubts over OPEC's compliance on production cut. Undeniably, USD strengthened also limited gains. Oil prices might still have room to climb higher from current levels with limited upside, though. Price beyond higher-50/bbl should trigger acceleration in US shale production. US natural gas price slumped on warmer-than-normal weather and less-than-expected decline in inventory. The front-month Nymex contract plunged -11% for the week.
OPEC Secretary General Mohammad Barkindo and Kuwait's Oil Minister were scheduled to meet over the weekend for preliminary discussions over mechanisms for monitoring compliance. Kuwaiti officials noted that OPEC members have reduced oil output this month to around 2.71M bpd. A report by Wall Street Journal suggested that Saudi Arabia has already cut oil output by at least -49M bpd to 10.06M bpd. Kuwait agreed to cut output by -0.13M bpd from January 1, from its October baseline production of 2.84M bpd. The resulting output of 2.68M bpd would also mean a drop from Kuwait's December's output of 2.9M bpd. Meanwhile, a Reuters survey indicated that OPEC production fell, for the first time in May, in December to 34.18M bpd, from a peak of 34.38M in November.
As OPEC and non-OPEC (ex. US) producers are beginning to reduce output, the number of oil rigs in the US climbed higher to take advantage of the crude oil price strength. According to Baker Hughes, oil rig counts rose for a 10th consecutive week, by +4 units to 529 in the week ended January 6. US shale production is on track to sequentially grow from 1Q17 onward. We expect oil prices to climb higher from current levels, but upsides are limited beyond higher-50/bbl. Prices around such levels would trigger increased US shale production.
Nymex natural gas futures recorded double-digit decline, falling to a 1-month low of 3.172 before settling at 3.285, last week. According to the US National Weather Service, it is likely that "cold air that comes in early January will retreat back to the west pretty quickly". Moreover, above-normal temperatures across the south and "pretty much everywhere east of the Mississippi river" are expected. On inventory, the EIA reported that US natural gas storage fell -49 bcf to 3 311 bcf in the week ended December 30. Stocks were -364 bcf less than the same period last year and -21 bcf above the five-year average of 3 332 bcf. Separately, Baker Hughes estimated that that the number of gas rigs added +3 units to 135 in the week ended January 6. In terms of drilling types, directional rigs gained +1 unit to 57, horizontal rigs added +2 units to 534 and vertical rigs added +4 units to 74. Together with the 4-unit increase in the number of oil rigs, the total number of rigs rose +7 units to 665.