Lukewarm reaction to OPEC supply cut extension
Saudi Arabia and Russia pledged to extend the supply deal but the lukewarm oil price response shows that scepticism prevails. We see oil prices trading between USD 45 and USD 50 per barrel. The persistent supply glut and reviving shale boom question the Middle East supply deal’s effectiveness, writes Norbert Rücker, Head Macro & Commodity Research, Julius Baer
What a difference 300 drilling rigs make. Unlike the sharp bounce seen in late November when the supply deal was first announced, oil prices reacted only modestly positive to yesterday’s news to extend the cuts by another nine months. Saudi Arabia and Russia pledged their support for an extension, and thus an agreement by all OPEC members at their upcoming meeting next week seems to have become a formality only.
Scepticism about the effectiveness of the supply deal had grown in recent weeks with global oil inventories receding much slower than anticipated. The market’s lukewarm reaction reveals that the belief in a successful OPEC strategy is eroding. Production growth from US shale basins, Canadian oil sands and Brazilian offshore fields undermine the Middle East’s restriction efforts. Moreover, Libya and Nigeria return from supply disruptions and will likely add oil supplies in the near term.
The supply cuts will translate to market share losses and the risks are great that compliance to quotas swiftly slips within the group. Kazakhstan already commented that the ramp-up of its Kashagan and Tengiz fields will make it difficult to follow the extension. Most importantly, the additional 300 drilling rigs active mostly across US shale basins since late last November are yet to fully show their production impact.
The latest official estimates published yesterday show that US shale production is set to grow to 5.4 million barrels per day by May. Shale output is set to surpass the previous 2015 peak by early summer.