Oil Market Rebalancing Hasn’t Even Started Yet

Oil Market Rebalancing Hasn’t Even Started Yet

Global oil production surged in June “as producers opened the taps,” according to a new report from the International Energy Agency (IEA). OPEC was a major culprit, with Libya and Nigeria doing their best to scuttle the production cuts made by other members.

But it wasn’t just those two countries, who are exempted from the agreed upon reductions. OPEC’s de facto leader, Saudi Arabia, also boosted output by an estimated 120,000 bpd in June, from a month earlier. That put Saudi production above 10 million barrels per day (mb/d) for the first time in 2017. Those gains, combined with the 80,000 bpd increase from Libya and a 60,000 bpd jump from Nigeria, plus some smaller contributions from Equatorial Guinea, put OPEC’s June production 340,000 bpd higher than in May. It also took the cartel’s compliance rate down to just 78 percent from 95 percent in May, the worst monthly figure for the group since its deal came into force at the start of the year.

Even worse, the production figures from Libya and Nigeria are much higher at this point than their June average. Over the past few months, the two countries have added 700,000 bpd in new supply, offsetting nearly half of the 1.8 mb/d in the combined OPEC/non-OPEC cuts. And more barrels could be on the way. Libya’s output is now above 1 mb/d, a four-year high, and Nigeria could see production “soar towards full capacity of roughly 1.8 mb/d during August,” the IEA says, up from 1.59 mb/d in June.

 

The IEA noted that the production cut deal is averaged over the entire compliance period through March 2018, so one month’s worth of data might not mean much. But it does not bode well. If the higher level of production continues, or if the compliance rate slips further, it would throw most projections about rebalancing out the window. “It will be a very difficult six months for the oil industry,” Fatih Birol, the IEA’s executive director, said at a conference in Istanbul. “It will be riding on the storm.”

Still, OPEC woes also mean that U.S. shale is suffering too. Prices collapsed in June, and there are many more causes for concern about the health of the shale industry than previously. The IEA said that “[f]inancial data suggests that while output might be gushing, profits are not,” with even executives from the industry saying that oil needs to be north of $50 per barrel for shale growth to be sustainable. U.S. shale might still grow in the near-term, but “the recent exuberance is being reined in,” the Paris-based energy agency concluded.

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