MARKET WATCH: US oil supply threatens recent market stability

The crude oil benchmarks in New York and London dropped to 3-month lows on Mar. 13 amid continued fears about oversupply from the US, heightened by the country’s expanding oil-directed rig count.

The crude oil benchmarks in New York and London dropped to 3-month lows on Mar. 13 amid continued fears about oversupply from the US, heightened by the country’s expanding oil-directed rig count.

Prices fell sharply last week as US crude oil inventories continued to grow to record levels, and the US Energy Information Administration lifted its US output forecasts for 2017-18 (OGJ Online, Mar. 10, 2017).

West Texas Intermediate prices had held steady at $50-55/bbl since December before dropping back below $50/bbl last week. Brent has traded slightly higher for the most part and remains above the $50/bbl threshold.

An already difficult week ended Mar. 10 was capped off by Baker Hughes Inc. reporting an eighth straight weekly gain for the US oil-directed rig count, which rose 8 units to 617, an increase of 301 units since May 27 (OGJ Online, Mar. 10, 2017).

Rigs targeting oil represent more than 80% of the total US rigs to have come online since the drilling rebound began follow a modern-era rig-count nadir on May 27, 2016. Operators continue to pencil in plans for rig deployments during the remainder of the year, particularly in the Permian basin.

During a ministerial address at CERAWeek by IHS Markit in Houston on Mar. 7, Khalid Al-Falih, Saudi minister of energy, industry, and mineral resources, and chairman of Saudi Aramco, emphasized the need for global collaboration for oil-market stability as the Organization of Petroleum Exporting Countries will no longer “bear the burden of free riders.”

OPEC members and major non-OPEC producing countries agreed late last year to collectively curtail output by about 1.8 million b/d during this year’s first 6 months. OPEC is set to meet again on May 25 in Vienna, where a possible extension of the agreement will be assessed.

“With an eye toward the May OPEC meeting, stability will take precedence over preservation of market share, meaning that the historic November 2016 agreement is likely to continue, albeit likely not in its current form,” Barclays said in a report Mar. 13.

The last thing that countries in the region need is a reversion to a prolonged period of heightened volatility. If an agreement remains in place, we assign low probability to Saudi Arabia’s output levels reaching above 10.7 [million b/d] again this summer.”

Energy prices

The crude oil contract for April delivery on the New York Mercantile Exchange fell 79¢ on Mar. 10 to $48.49/bbl. The May contract declined 80¢ to $49.03/bbl.

The natural gas price for April increased 3.4¢ to a rounded $3.01/MMbtu. The Henry Hub cash gas price closed at $2.98/MMbtu, climbing 15¢.

Heating oil for April lost 2.59¢ to a rounded $1.50/gal. Reformulated gasoline stock for oxygenate blending for April decreased 2.42¢ to a rounded $1.60/gal.

The Brent crude contract for May on London’s ICE declined 82¢ to $51.37/bbl. The June contract lost 83¢ to $51.63/bbl. Gas oil for April dropped $2.75 to $459.75/tonne.

The average price for OPEC’s basket of benchmark crudes on Mar. 10 was $49.81/bbl, down $1.01.

Contact Matt Zborowski at matthewz@ogjonline.com.

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