The past week has seen another bout of volatility on oil Markets as OPEC announces an increase in output

By Eithne Treanor

It was another week of volatility on the oil market as OPEC said its March oil output increased. Saudi Arabia continues to pump more oil and while the price is finding some sense of stability, the uncertainty continues. In early trading on Friday, Brent crude was priced around US$63 a barrel with WTI above US$56 a barrel.

OPEC’s monthly oil market report surprised the market with production up by 810,000 barrels for March. OPEC’s collective production now stands at 30.79 million barrels. The oil price has enjoyed a 16 per cent gain this month, but with so much oil on the market, analysts fear the price could fall further.

Citigroup issued a report this week expecting prices to continue falling in the coming months. As high stocks continue to build, there’s a danger more investors are beginning to sell. Citigroup warned of “weakness ahead.”

The OPEC monthly report says it sees American oil supply growing to 13.65 million barrels a day in the second half of the year with expectations that it will level off and decline thereafter. Only last week the US Energy Information Administration said that American production was declining by 57,000 barrels a day this month. The International Energy Agency agreed that US production would “decline over time” if new wells were not brought online.

The good news from the IEA in its monthly report was that the agency raised its forecast for 2015 global oil demand by 90,000 barrels per day. The report said that a “steadily improving global economic backdrop” and colder first quarter temperatures were driving demand. Oil production is at record highs and the IEA cautioned of the massive build in crude stocks. “Year-on-year gains totalling a whopping 3.5 million barrels a day were split between OPEC and non-OPEC production.”

A report this week from the Bank of America Merrill Lynch Global Research team says, “oil producers are experiencing a meaningful demand drop,” and warned that the outlook for commodity exporting nations looks bleak. “While oil exporters took up roughly half of the world’s oil demand growth in the last decade, the picture is reversing due to lower oil prices.”

The report cites demand growth in Russia and in Brazil as flat or falling. Looking at countries like Saudi Arabia where “oil intake is still growing,” the report cautions that “global oil demand is a bit better than last year, but stocks are still building and the recent run up in prices could lose steam sooner rather than later.”

The industry continues to closely watch the Baker Hughes rig count and with 238 drilling rigs off the market in March, OPEC sees this as a sign of American production decline. Approximately 335 rigs were taken off the market in February, indicating more high cost producers were being squeezed. OPEC’s monthly report also cites a fall in the number of drilling permits in the US and a cut back in capital spending from the major international players.

While American oil producers may be cutting back, the pumps are on full throttle in Saudi Arabia. Oil production was up by 658,800 barrels to total close to 10.3 million barrels a day in March. This is in line with the Saudi Arabian led OPEC strategy of not interfering in the market by holding back production in a lower price environment.

OPEC and the Saudi Arabian oil minister Ali Al Naimi continue to stress that the non-OPEC players need to voluntarily cut production and take a more responsible attitude in the fundamentals of oil market supply. A report by Bloomberg says this increase in Saudi oil production in the past 31 days is equivalent to 3 years effort in North Dakota’s Bakken output. Based on figures from the Texas state industrial commission, Bakken shale output rose by 668,000 barrels a day from early 2012 till the end of 2014.

The March monthly reports from OPEC and the IEA see signs of improved global economic activity. The driving season in the US will hopefully contribute to higher demand, but there was little comment on a prospective return of Iranian crude to the market. While additional crude stocks ease slightly, inventory is still at an all time high, the OPEC report expects, “higher global refinery runs, driven by increased seasonal demand, along with the improvement in refinery margins, are likely to increase demand.”

This situation should hopefully deplete some of the high oil inventories. American stocks alone, according to the EIA’s weekly report stand at 483.7 million barrels. Thomas Pugh, Commodities Economist at Capital Economics in London says, “the upshot is that lower oil production, higher refinery throughputs and lower imports all suggest that crude stocks may be close to peaking peak, even though it is probably a little early to call the turn just yet.”

Uncertainty still dominates the market but sentiment is gradually improving. The best the IEA could offer in this months report was that while, “one might be hoping for more clarity on supply and demand,” the reality is sadly “in some ways, the outlook is only getting murkier.”

http://www.opec.org/opec_web/en/publications/338.htm

http://www.opec.org/opec_web/en/multimedia/351.htm