Americas, Asia do what OPEC wouldn’t: cut oil production
HOUSTON/SINGAPORE – Wildfires in Canada. Instability in Venezuela. US frackers at a standstill. Drops in oil output are happening so fast that it looks as if the Americas alone could resolve global oversupply.
The 70 percent price slide between 2014 and early 2016 has been pegged to one problem: production exceeding demand by as much as 2 million barrels per day (bpd).
But oversupply is evaporating quickly due to output cuts in the Americas – which includes the United States, Canada and Latin America – and also increasingly in Asia, the world’s top oil consuming region.
“Unplanned oil supply disruptions have been a key element so far this year that have contributed to a tighter oil market than was otherwise expected,” said analyst Guy Baber of Simmons & Co.
Baber even cautioned that if the disruptions were to linger, there would be limited excess capacity to feed a tight market.
Output from the Americas has dropped over 1.5 million bpd in the past quarter, while producers in Asia and Australia have cut some 250,000 bpd, eating away large chunks of the world’s oversupply, government, industry and consultancy data shows.
This comes at a time when members of the Organization of the Petroleum Exporting Countries (OPEC), like Saudi Arabia, Kuwait, Iran and also Iraq, have refused to curb output despite the plunge in oil prices in order to retain market share and squeeze out higher-cost competitors.
“The Saudis have achieved what they want in that the market is re-balancing through price,” said senior oil analyst Neil Beveridge of Sanford C. Bernstein.
“Over the past 12 months Saudi has raised production, putting downward pressure on price to bring back discipline among the producers. This is now playing out.”
Outages in Canada are helping “speed up the re-balancing”, Beveridge added.
A wildfire in Fort McMurray, at the heart of Canada’s oil sands region, has forced more than 690,000 bpd out of production, according to Reuters estimates, with more disruptions possible.
“In the last two years, outages have not been the focus because of the imbalance in the market, but that changes now that the market is tightening,” said Richard Gorry, director of JBC Energy Asia.
US output, already having plunged by 410,000 bpd this year and 800,000 bpd since mid-2015, is expected to slide another 800,000 bpd in the next five months, according to the Energy Information Administration.
Latin America’s crude oil production, suffering from under-investment, fell 4.6 percent in the first quarter of the year to 9.13 million bpd, a loss of 441,000 bpd from the same period a year ago, according to data from individual countries and OPEC.
The largest decline was in Venezuela, which lost 188,000 bpd in the first quarter as President Nicolas Maduro’s government wrestles a deep economic crisis.
Production is also on the wane across Asia Pacific.
China, the region’s biggest producer and consumer of oil, is expected to see a 6 percent drop in crude output in 2016 due to ageing fields and poor economics, Standard Chartered bank says.
Signs of tighter supply helped lift oil prices to more than five-month highs last week. US WTI crude hit an intraday high above $46 a barrel on Thursday, within striking distance of the recent peak.
Nonetheless, with rising Middle Eastern output, near-record production in Russia and brimming global storage tanks, the supply overhang in the world is set to stay for some time. Brent futures for delivery five years out are only at a small $10 per barrel premium to one-month contracts, an indication the “lower for longer” price scenario may linger. -Reuters