Tightened Global Oil Balance Drives Crude Rally, but Will It Last?
Crude prices have rallied from the summer lows in June to break $50/bbl once again as the impact from OPEC cuts has started to trim the global oil market’s excess storage levels, but the ability for OPEC cuts to drive prices higher in 2018 continues to be in question.
OPEC cuts are planned through March 2018, but the impact of the OPEC cuts is being unraveled on several fronts. First, US producers continue to become more efficient. While a theme from 2Q earnings has been 2Q misses on crude production, producers remain focused on hitting or raising full-year targets as completion crews catch up to the drilling fleet (See Permian DUCs on the Rise). Further hindering the effectiveness of OPEC cuts are several internal challenges. Between May and July, growth from OPEC production could approach 500 Mb/d if members don’t curtail output further to offset Libya and Nigeria growth. After years of struggling, both Nigeria and Libya have recently been successful in bringing production back from recent lows.
While official reported numbers for July production levels are still a month away, Nigeria has stated that it has achieved 2.06 MMb/d of liquids production in July compared to 1.8 MMb/d in January 2017, and Libya continues to make gains towards producing its stated goal of 1.25 MMb/d by the end of 2017, up from just 0.4 MMb/d at this time last year.
Outside of the Middle East, the US also continues to expect robust growth through 2018, and is compounding the impact of Nigerian and Libyan crude coming to market. In fact, looking at a chart that compares BTU Analytics’ US liquids outlook and stated growth targets for several Middle Eastern and African countries shows that between January 2017 when cuts were first implemented and March 2018 when current cuts are expected to roll off, US liquids production growth dwarfs the recent and expected rebounds from Libya and Nigeria.
Thus, between rebounds in global oil production and growth plans from US producers in a $50/bbl environment, the recent rally in crude could be cut short as balances begin to tip back to being long.
Even with potential US growth and resumed OPEC production in 2018, risks to this outlook persist. In Venezuela, for example, which produces just over 2.1 MMb/d of liquids production, tensions continue to escalate as the US is increasingly adding sanctions against members of the government. Should Venezuela further destabilize and remove material supply from the global market, offsetting impending production gains in the US, oil could find significant support above $50/bbl.