Is the U.S. turning into OPEC’s nightmare? What analysts are watching for in EIA report
An oil pumpjack in Sweetwater, Texas
Remember the oversupply worries in the oil market that sent prices to a 13-year low last year? They are back.
After an inventory report out late Tuesday showed a surge in U.S. oil supply, analysts are now fretting that more bearish news could be coming, possibly as soon as Wednesday when the Energy Information Administration releases its weekly supply report.
The American Petroleum Institute in its Tuesday report reported a jump of 14.2 million barrels in U.S. crude supplies for last week, more than five times analysts’ forecasts for a 2.5-million barrel increase. That surprise has sent oil prices slumping on Wednesday morning, with West Texas Intermediate crude CLH7, -0.65% down 1.1% at $51.61 a barrel and Brent LCOJ7, -0.36% off 0.7% to $54.68.
In fact, crude prices dropped for a second straight session on Tuesday to close at a three-week low in part as traders digested weekend data showing a record level of long positions in the oil market.
“If today’s [U.S.] crude oil inventories are similarly strong, any hopes that OPEC producers had of $60 oil could quickly evaporate. It would appear that U.S. producers, as it was expected they might be, are turning into OPEC’s biggest nightmare,” said Michael Hewson, chief market analyst at CMC Markets, in a note.
U.S. shale — the elephant in the room
Crude oil prices have soared more than 70% over the past 12 months, partly due to efforts by the Organization of the Petroleum Exporting Countries to stabilize the market. In late November, the cartel agreed on a deal to cut production and convinced several non-OPEC members, including major oil producer Russia, to join the plan. The output deal came into effect on Jan 1. and evidence suggests the nations are sticking to their new output quotas.
However, the U.S. was never part of such a deal. Instead of cutting production to combat the global supply glut, the country has instead quietly been sitting on the sidelines, enjoying the OPEC-fueled bump in oil prices. Analysts say the higher prices are enticing U.S. shale producers to boost output, potentially resurfacing concerns of a global supply glut.
“The resurgence of U.S shale amid the rising oil could undermine the efforts of OPEC and Non-OPEC members in mitigating the global oversupply, consequently leaving oil prices vulnerable,” said Lukman Otunuga, research analyst at FXTM
“There is a threat of the OPEC production cut deal falling apart in the future if U.S shale continues to pump incessantly. Although oil prices were initially buoyed by the optimism over OPEC and non-OPEC members achieving roughly 82% compliance with its production cut, the big elephant in the room known as U.S shale should limit upside gains,” he added.
Production in U.S. poised for highest since 1970
And the elephant could be addressed on Wednesday. The EIA is releasing its weekly inventory report at 10:30 a.m. Eastern Time and any confirmation of the API trend is seen as sparking renewed jitters in the oil market.
In its Short-Term Energy Outlook report released on Tuesday, the EIA said the global oil market is on track to be “relatively balanced” this year and next. That forecast is sooner than previously expected. The agency, however, also raised its estimate for U.S. oil production by 230,000 to 9.5 million barrels a day in 2018, which would be the highest level of production since 1970, according to Commerzbank.
“If [Wednesday’s] number echoes what we heard last night, a serious selloff, which has the ability to drive the oil price into the mid $40s, is strongly in the cards,” said Naeem Aslam, chief market analyst at Think Forex UK, a note.
“A price war could be triggered once again and preserving your market share at any cost could become the theme among major producers,” he added.
However, the EIA inventory data have been volatile lately, as shown in this chart by Samir Madani, co-founder of TankerTrackers.com and initiator of the #OOTT hashtag. That means one week’s data may not tell the whole story.
Ole Hansen, head of commodity strategy at Saxo Bank, said in emailed comments that the past three previous EIA reports have been overwhelmingly bearish, but that oil prices nevertheless managed to rebound following an initial setback. That reaction pattern could change this Wednesday, he said.
“I believe this time round could be different as I fail to see what positives — not already known — could pull [prices] higher,” he said.
An oil pumpjack in Sweetwater, Texas
Remember the oversupply worries in the oil market that sent prices to a 13-year low last year? They are back.
After an inventory report out late Tuesday showed a surge in U.S. oil supply, analysts are now fretting that more bearish news could be coming, possibly as soon as Wednesday when the Energy Information Administration releases its weekly supply report.
The American Petroleum Institute in its Tuesday report reported a jump of 14.2 million barrels in U.S. crude supplies for last week, more than five times analysts’ forecasts for a 2.5-million barrel increase. That surprise has sent oil prices slumping on Wednesday morning, with West Texas Intermediate crude CLH7, -0.65% down 1.1% at $51.61 a barrel and Brent LCOJ7, -0.36% off 0.7% to $54.68.
In fact, crude prices dropped for a second straight session on Tuesday to close at a three-week low in part as traders digested weekend data showing a record level of long positions in the oil market.
“If today’s [U.S.] crude oil inventories are similarly strong, any hopes that OPEC producers had of $60 oil could quickly evaporate. It would appear that U.S. producers, as it was expected they might be, are turning into OPEC’s biggest nightmare,” said Michael Hewson, chief market analyst at CMC Markets, in a note.
U.S. shale — the elephant in the room
Crude oil prices have soared more than 70% over the past 12 months, partly due to efforts by the Organization of the Petroleum Exporting Countries to stabilize the market. In late November, the cartel agreed on a deal to cut production and convinced several non-OPEC members, including major oil producer Russia, to join the plan. The output deal came into effect on Jan 1. and evidence suggests the nations are sticking to their new output quotas.
However, the U.S. was never part of such a deal. Instead of cutting production to combat the global supply glut, the country has instead quietly been sitting on the sidelines, enjoying the OPEC-fueled bump in oil prices. Analysts say the higher prices are enticing U.S. shale producers to boost output, potentially resurfacing concerns of a global supply glut.
“The resurgence of U.S shale amid the rising oil could undermine the efforts of OPEC and Non-OPEC members in mitigating the global oversupply, consequently leaving oil prices vulnerable,” said Lukman Otunuga, research analyst at FXTM
“There is a threat of the OPEC production cut deal falling apart in the future if U.S shale continues to pump incessantly. Although oil prices were initially buoyed by the optimism over OPEC and non-OPEC members achieving roughly 82% compliance with its production cut, the big elephant in the room known as U.S shale should limit upside gains,” he added.
Production in U.S. poised for highest since 1970
And the elephant could be addressed on Wednesday. The EIA is releasing its weekly inventory report at 10:30 a.m. Eastern Time and any confirmation of the API trend is seen as sparking renewed jitters in the oil market.
In its Short-Term Energy Outlook report released on Tuesday, the EIA said the global oil market is on track to be “relatively balanced” this year and next. That forecast is sooner than previously expected. The agency, however, also raised its estimate for U.S. oil production by 230,000 to 9.5 million barrels a day in 2018, which would be the highest level of production since 1970, according to Commerzbank.
“If [Wednesday’s] number echoes what we heard last night, a serious selloff, which has the ability to drive the oil price into the mid $40s, is strongly in the cards,” said Naeem Aslam, chief market analyst at Think Forex UK, a note.
“A price war could be triggered once again and preserving your market share at any cost could become the theme among major producers,” he added.
However, the EIA inventory data have been volatile lately, as shown in this chart by Samir Madani, co-founder of TankerTrackers.com and initiator of the #OOTT hashtag. That means one week’s data may not tell the whole story.
Ole Hansen, head of commodity strategy at Saxo Bank, said in emailed comments that the past three previous EIA reports have been overwhelmingly bearish, but that oil prices nevertheless managed to rebound following an initial setback. That reaction pattern could change this Wednesday, he said.
“I believe this time round could be different as I fail to see what positives — not already known — could pull [prices] higher,” he said.
