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Weekly Fundamentals - Oil Prices Recovered, Gains Likely Limited due to Lacklustre Demand Growth and Supply Reduction Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Sat Jul 15 17 20:43 ET

Crude oil prices recovered last week, as both the EIA and API reported huge decline in US inventory for the prior week, and the EIA revised lower its oil output forecast for 2018. However, the demand/supply balance outlook remains negative for prices as the EIA also downgraded its demand forecast. Meanwhile the IEA warned that the rebalancing of the oil market has taken too long. The agency also estimated lower compliance of OPEC in the production cut deal. Although some OPEC members hope Libya and Nigeria to cap oil output, it would likely materialize anytime soon. Kuwait's OPEC governor Haitham Al-Ghais noted that "all this talk about putting a production cap on Libya and Nigeria is premature". He defended that "data so far is showing that the real spike in production only happened in June".

The EIA estimated that US crude oil production averaged an estimated 8.9M bpd in 2016 and is forecast to average 9.3M bpd and 9.9M bpd in 2017 and 2018 , respectively. While 2018's forecast marks the highest annual average production in US history, surpassing the previous record of 9.6M bpd, the projection was -0.1M bpd below last month's forecast. The lower crude oil production forecast for 2018 reflects lower forecast crude oil prices compared with last month's report. The EIA cut its 2017 world oil demand growth forecast by -0.07M bpd to 1.47M bpd. Demand growth was lowered, by -0.1M bpd, to 1.61m bpd for 2018.

As suggested in the latest monthly report by the Paris-based International Energy Agency, compliance among OPEC members dropped to 78%, the lowest level since the start of the deal, in June. Over the past months, Saudi Arabia produced much less than required (over-compliance) so as to offset other members' overproduction, defending the compliance level to over 90%. However, the Kingdom, while still producing within limits, increased output last month. The report, however, added that, "in passing, it is worth noting that compliance from the ten non-OPEC producers who volunteered to cut production improved to 82% in June, higher than the rate achieved by OPEC". Meanwhile, two OPEC members that were exempted from output cut raised production significantly in June. According to the IEA, "this month, there are two hitches: a dramatic recovery in oil production from Libya and Nigeria and a lower rate of compliance by OPEC with its own output agreement". The two countries contributed the most to OPEC's aggregate increase in production in June (+0.39M bpd m/m). Libya's output jumped +0.13M bpd to 0.85M bpd, while Nigerian output soared +0.1M bpd to 1.73M bpd.

The IEA was more positive over the demand outlook, though. According to the agency, global demand, after lacklustre 1.0 mb/d growth in 1Q17, dramatically accelerated to 1.5M bpd in 2Q17. For 2017 as a whole, "demand is forecast to reach 98M b/d, with growth revised up by +0.1M b/d compared to last month's Report to 1.4M b/d. Further growth of 1.4M b/d is foreseen for 2018, with global demand reaching 99.4M b/d". The agency added that "financial data suggests that while output might be gushing, profits are not and recent press reports quoted leading company executives saying that oil prices need to be around US$50/bbl to maintain production growth".

The front-month Nymex natural gas contract rose to a two-week high of 3.053 earlier this week, on hopes that warmer-than-expected weather might boost demand for electricity (cooling demand). Gains were, however, pared by falling for three days in a row. The contract ended the week at 2.98, up +4.05%. The EIA reported that gas storage rose +57 bcf to 2 945 bcf in the week ended July 7. Stocks were -289 bcf less than the same period last year and +172 bcf above the five-year average of 2 773 bcf. Total working gas storage stayed within the five-year historical range for the week. In the monthly report, the EIA indicated that natural gas storage injections typically occur from April through the first half of November. It projects that natural gas inventories will be 3 940 bcf at the end of October 2017, which would be +2% higher than the five-year average but+ 2% lower than the record high end-of-October level from 2016.

Separately, Baker Hughes reported that the number of gas rigs dropped -2 units to 187 in the week ended July 14. In terms of drilling types, directional rigs slipped -2 units to 72, horizontal rigs stayed unchanged at 804 units to 771 and vertical rigs added +2 units to 76. Together with the 2-unit increase in oil rigs, the total number of rigs steadied at 952 units for the week.

 

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