Potential for Stronger Output Suppress Increase in Oil Prices

Potential for Stronger Output Suppress Increase in Oil Prices

Oil prices increased on July 3, amid the first fall in US drilling activity in months, although gains were capped by reports of rising OPEC output last month even as the group has pledged to cut supply.

Today, US Crude was up by 0.6% on earlier market trading or 27 cents at $45.20 a barrel; on the other hand, Brent was also seen with the same 0.6% increase in earlier trading or 30 cents at $47.72 per barrel.

A 28 cent increase was witnessed in U.S. West Texas Intermediate to sell at $44.01 a barrel.

For the first time since January, drilling activity dropped in the US.

"I expect the gains for OPEC to be higher during the second semester 2017 due to a tight market in the third and fourth quarter, despite an oversupply from non-OPEC not tied to the OPEC agreement and higher-than-expected production from Libya and Nigeria", said Chakib Khelil, Algeria's former oil minister. While oil production in the USA may plateau in the near term and help prices stage a modest recovery, we believe that higher Non-Opec output coupled with production gains in Libya and Nigeria will cap prices around $53-55.

Crude oil prices settled sharply higher in futures market on Friday. Copper bottomed out at a low of $5,462.50 a ton on May 8, below Goldman's three-month target of $6,200. WTI crude fell 14 percent to $46.04 per barrel in 1H2017, while Brent crude declined 16 percent to $48.77 per barrel over the same period. The production data showed that the production from Libya was much stronger than expected and this pushed the oil prices through $45 and then for a couple of weeks, the oil inventory data from the USA showed a clear build up in the inventory when a draw was expected and this added to the pressure on the oil prices.

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"I think the extent to which Saudi Arabia bled revenue during 2014-2016 forced them back to the OPEC table before the job of really turning the screw on USA shale and other non-OPEC supply was completed", said David Fyfe, chief economist at trading firm Gunvor. This figure is the highest since June 2013.

Saudi Arabia is the largest OPEC supplier of oil to the USA, shipping a total of 14.5 billion barrels of oil since 1986.

To offer a backdrop, the Opec in its May meeting made a decision to extend output cuts until March 2018.

Libya's output has rebounded from only 690,000 barrels a day at the start of the year, with Sharara, the country's largest oil field, resuming production last month. OPEC and its partners aren't anxious about the market recovery and don't plan to discuss deeper cuts, said United Arab Emirates Energy Minister Suhail Al Mazrouei.

In 2016, on its first full year without the export restriction, U.S. exports of crude oil and petroleum products grew 10 percent despite the production dip during the same year. OPEC states and 11 other exporters agreed in May to extend cuts of 1.8 million barrels per day (bpd) until March. As per our estimates, Opec's production edged higher by 0.5 mbpd in June to 32.7 mbpd, a six-month high as Libyan and Nigerian production increased.