Published: Mon, June 19, 2017
Business | By Max Garcia

Oil prices decline as doubts grow over OPEC's supply cuts

Oil prices fell to their lowest in over five weeks on Wednesday, following US data showing an unexpectedly large weekly build in USA gasoline inventories and International Energy Agency (IEA) data projecting an increase in non-OPEC production.

The recovery in the price of oil from last year's lows has, however, made it profitable once again for US shale oil companies to ramp up production.

Opec and other exporters such as Russian Federation have agreed to keep production nearly 1.8 million barrels per day (bpd) below the levels pumped at the end of previous year and not to increase output until the end of the first quarter of 2018.

Despite almost six months of OPEC-led efforts to reduce a global glut, oil prices have not stabilized at higher levels as many had anticipated when the group agreed with other producers to cut supply back.

Last month, OPEC and some non-OPEC producers extended a deal to cut 1.8 million barrels per day in supply until March 2018.

In a sign of the ongoing supply overhang, traders are increasingly hiring tankers again to store unsold crude, waiting to sell later at a higher price.

US inventories fell less than forecast last week, keeping supplies more than 100 million barrels above the five-year average, according to data from the Energy Information Administration on Wednesday. For distillate inventories including diesel, the EIA reported a rise of 328,000 barrels. For OECD inventories to return to the normalized levels, OPEC needs to drain by 34 million barrels a month or 1 million barrels for the next 10 months.

That is "really confirming the fact from last week that demand is a lot lower", said Tariq Zahir, managing member of Tyche Capital Advisors. "That doesn't happen at this time of year".

Growth in oil supply will outstrip growth in demand during 2018, driven by increasing production from United States shale and other countries outside Opec, the International Energy Agency (IEA) said.

"This is very unusual for this time of the year, when gasoline demand is supposed to pick up", said Carsten Fritsch, oil analyst at Commerzbank AG in Frankfurt, Germany.

The U.S. Energy Information Agency published a weekly report Wednesday showing gasoline inventories unexpectedly surged by 2.1 million barrels.

However, the big problem is the U.S. and the speed at which it is adding new oil rigs.

The bulk of the upward adjustment in non-OPEC oil supply since December "has come from the US", OPEC said.

This implies that crude oil price, which stood at $48.27 per barrel, last week, would increase to $51 per barrel or more, signalling a good omen for Nigeria, which depends on crude oil for its fiscal responsibilities. "If we get to July. and nothing's changed, you could see it break $40", he said.

Nymex reformulated gasoline blendstock-the benchmark gasoline contract-fell 1.15% to $1.48 a gallon on Wednesday.

-Jenny W. Hsu and Summer Said contributed to this article.

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