OPEC’s strategy has not worked. Saudi Arabia is having cold sweat now. Crude oil price is hitting the lowest for the year 2017, just 2 bucks away from US$42 a barrel. Earlier, we wrote that for the second time for the year, the U.S. crude had broken below US$48 a barrel. The price is currently struggling to stay above US$44 a barrel as we speak.
On Wednesday, a day after the American Petroleum Institute (API) injected a bit of optimism among traders by reporting a crude oil inventory draw of 4.2 million barrels, the U.S. EIA once again poured cold water on the oil bulls by reporting a much smaller decline – 900,000 barrels – against expectations for a decrease of 2.3 million barrels.
Essentially, crude is now back to levels last seen before the OPEC (Organization of the Petroleum Exporting Countries) and other producers said they would cut output by almost 1.8 million barrels per day (bpd) during the first half of the year in a bid to tighten the market. OPEC, Saudi and Russia can sing all they want about cutting production – they’re fighting a losing battle.
OPEC is scheduled to meet on May 25 to decide whether to extend the cuts. But what could they do besides extending its June expiry to help clear a glut? Absolutely nothing – U.S. oil production has risen over 10% since mid-2016 to 9.3 million bpd, levels not far away from top producers Russia and Saudi Arabia. And the shale producers are still pumping like mad.
The latest U.S. data shows the country’s oil production has risen to 9.3 million barrels per day, just 300,000 barrels off the peak output of 2015. America now has a whopping 527.8-million barrels of stock. The only thing that is stopping shale drillers from drilling is the rising cost for equipment as demand from drillers increase.
James Woods, global investment analyst at Rivkin Securities, said – “Any likelihood of an increase in the level of cuts remains slim with OPEC officials playing down this possibility.” According to Reuters, the amount of oil stored on tankers in Malaysia’s waters has surged again, after drawing down slightly in March and April – a sign of continuous oversupply.
The conflict in Libya, a country that possesses the largest oil reserve in Africa, is ending. In fact, U.S. crude output is at its highest since August 2015 and has never looked back. In Canada, the Syncrude Canada oil sands project has started shipping crude from its Mildred Lake again after cutting production due to a fire in March.
Amazingly, despite OPEC’s compliance to production quotas, the world’s storage tanks are still brimming. People keep forecasting that global inventories are going to come down, but so far, they haven’t for the most part. Although the U.S. crude stockpiles have fallen in the last four weeks, they remain near an all-time high set in March.
At 6-month low, OPEC and Saudi Arabia appear to be clueless on the next tool to use to tackle the plunge? Even if they decide to gamble on deeper cuts in production, therefore, boosting the price, the notorious U.S. shale drillers would be encouraged to pump more and more. Saudi’s plan to go public on Aramco will be greatly jeopardised with the bearish oil market.
Interestingly, when Saudi announced a cut on “all allowances, financial benefits, and bonuses” for civil servants on September 2016, the crude was trading at around US$45 a barrel. The price was at US$50 when King Salman announced a restoration of all the perks and benefits last week. Now, the crude dives back to below US$45. Will Saudi make another U-turn?
Like it or not, the market has proven once again that OPEC isn’t the most important player in the oil market any more. In the same breath, Saudi Arabia has lost its magic wand of determining the global oil prices. The U.S. shale is the kingmaker now. America will drive and decide the future crude oil market.