There was a significant reduction in US crude oil inventories, helping to spur price rises in the process.
At last count, WTI crude oil was trading at $48.48 per barrel (+1.59%) while Brent crude oil – the international benchmark – was trading at $51.67 per barrel (+1.47%).
These numbers are encouraging for crude oil, given the 10% slide over the past 8 days. Black gold has managed to claw its way up a slippery slope after 3 months of weakness. According to the IEA (International Energy Agency), the recovery in crude oil will be slow and gradual.
Meanwhile, the EIA (United States Energy Information Administration) reported a surprising downturn in inventories by 237K barrels for the week ending March 10, 2017. This marks the first time in months that US oil inventories have not risen. Commodities traders and analysts were anticipating an increase of 3.7 million barrels in the US for the week ending March 10.
Now, US oil stockpiles are standing at 528.2 million barrels, with crude oil imports declining by 565,000 barrels. The Energy Information Administration (EIA) reported an increase of 2.13 million barrels at the Cushing, Oklahoma facility. Meanwhile, the 1.6% increase in WTI crude oil stock was a welcome change after the price hit a multi-month low on Tuesday, 14 March.
Saudi Arabia and Russia Toggling Crude Oil Production
In November 2016, the de facto leader of OPEC, Saudi Arabia agreed to cut production dramatically. Russia came on board with the plan, and this helped the price of Brent crude oil to rise from multiyear lows.
Saudi Arabia has cut production, but the actual production figures for February and the proposed cuts do not add up. This led to a sharp selloff in the oil price on Tuesday, 14 March. While OPEC countries have largely complied with the production cuts (around 90% compliance), Russia has not and is only at 40% compliance.
This means that more oil is being produced than what was agreed upon, and this has resulted in prices remaining at depressed levels. Of equal concern for OPEC production figures is the exclusion of two major OPEC producers in Libya and Nigeria. They have been exempted from complying with the November deal brokered by OPEC and Russia.
How Are US Crude Oil Produces Reacting to Decrease Production from OPEC?
According to Baker Hughes Inc., the US oil rig count has increased by 100% since May 2016. This indicates that more oil producers are coming back online after a long hiatus.
Traders at leading hubs are shorting crude oil en masse, knowing that things are going to get worse before they get better. As more US producers drill for oil, so production levels increase and the price invariably moves lower.
This counterproductive process is necessary until a new equilibrium price is established. US oil producers are expected to increase their supply to 10 million barrels per day in 2017. A gathering of oil bigwigs in Houston, Texas recently included OPEC and WTI crude oil producers.
OPEC representatives did not give assurances that they would continue with reduced production after June 30, 2017. OPEC realizes that WTI crude oil producers benefit from reduced overall production.
With the exception of Saudi Arabia, the overall compliance rate among the remaining OPEC countries is just 50% – hardly reassuring for an entire organization that is responsible for most oil production. It is unlikely that WTI crude oil will surpass $60 per barrel in 2017, given that too much production, too little demand, and excess inventory levels are likely to continue.
The Saudis are loathe to keep their production levels depressed, for fear that it’ll give US crude oil producers a leg up in the highly lucrative and fiercely competitive oil markets.