Oil a slick customer: Supply-side pressures continue

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Shishir Asthana Moneycontrol Research

On the surface, oil prices seem to have settled down in a range between USD 45 and USD 50 a barrel. However, the strong under-current tension between supply and demand should have led to more volatile prices. That is not the case.

The struggle looks to be concentrated among suppliers. Two sides are at each other constantly: Oil producer lobbies of Organisation of the Petroleum Exporting Countries (OPEC) and some non-OPEC members like Russia on the one hand and shale gas and oil producers backed by the US government, on the other.

OPEC has been trying hard to bolster crude oil prices by announcing production cuts but its efforts have at best resulted in preventing the slide in oil prices. US has been steadily increasing its production.

The second round of production cuts announced by OPEC nations was not enough to boost market sentiment which led to a fall in oil prices immediately after the news.

However, it soon recovered most of the lost ground on news of a drop in production in US. Oil prices posted their longest winning streak of eight days since 2012. News of a loss of production in US falling by 100,000 barrels and a drop in rig count helped push oil prices from USD 45 levels to USD 49. But that’s where the good news ends.

Firstly, the dip in oil prices is temporary as the fall was on account of tropical storms. As for the drop in oil rig count, it was mainly because of a shut-down owing to maintenance. Oil rig count has been rising for 23 weeks continuously before the present dip of two rigs from a rig count of 756.

But the bigger supply-side pressure is likely to come from OPEC itself.

OPEC’s production and exports are well above their projected levels. Though OPEC as a group had claimed to cut crude oil production, it has exported more oil in the first six months of this year than it did in 2016. Over the first six months of 2017, OPEC’s average exports stood at 25.02 million barrels -- a gain of 290,000 barrels over the same period of 2016.

June saw a bigger jump in oil exports by OPEC nations which jumped to 25.92 million barrels, up 450,000 barrels from May's 25.47 million barrels, according to a Reuters report.

Though OPEC claims a high level of compliance among its member nations at 92 percent, data on the ground shows a high level of supplies. Saudi Arabia seems to be the only major supplier complying with its restriction limits. United Arab Emirates’ production has risen to an average 2.8 million barrels in the first half of this year from 2.52 million barrels in the same period in 2016. Iran has increased production by 450,000 barrels to 2.13 million barrels.

Other OPEC members like Libya and Nigeria, who were not bound by production cuts, have increased their production levels, close to their original levels.

Supply-side pressure is likely to continue as both Iraq and Iran are increasing their oil productions. Iraq’s Oil Minister Jabbar Al-Luaibi said that he no longer feels there is a need for deeper production cuts and will keep investing to raise capacity to 5 million barrels a day by year-end even if prices fall. Iran, too, has pledged to increase its production level to pre-sanction levels.

With supply-side pressure likely to continue and demand for energy showing little signs of growth, oil prices could re-test the lows, unless there is some political development in the Middle East that can play into the hands of the oil bulls.

For Indian economy and markets, a low oil price is a boon.