Global overcapacity drags oil prices down to six-month lows

Jay Anderson
June 19, 2017

Crude oil prices fell almost 4 percent Wednesday after government data showed gasoline inventories and oil production increased.

USA crude futures fell by 1% to trade at $45.97 a barrel after the report was released.

OPEC's pledge was to cut some 1.2 million bpd, while other producers including Russian Federation agreed to bring the total reduction to nearly 1.8 million bpd.

Shale supply has pushed United States crude production up by about 10 per cent over the previous year to 9.3 million bpd, not far below the output of top exporter, Saudi Arabia. Analysts had forecast a 700,000 barrel decline in gasoline inventories and a 600,000 barrel rise in distillates.

The International Energy Agency said stored oil in industrialized nations-a proxy for global supply- grew by 18.6 million barrels in April.

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"The revisions to non-OPEC supply growth have been much greater than the upward adjustments to world oil demand growth, accentuating the imbalance in the market", it said. Total non-Opec production in 2018, led by the USA, is set to rise by 1.5m b/d - or more than double the rate of growth this year.

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The U.S. oil boom will keep piling on the pain for OPEC well into next year.

After holding steady in European trading, oil prices were subjected to heavy selling pressure and 5-week lows following the latest EIA inventories data.

"OPEC 2017 year-to-date exports are only down by 0.3 million barrels per day (bpd) from the October 2016 baseline", analysts at AB Bernstein said.

Prices have risen but OPEC's share of production is set to decline once more in both 2017 and 2018, which could force another change of strategy. Prices are down 1.6 percent this week.

The Organisation of the Petroleum Exporting Countries agreed to extend that deal that began in January through March 2018, but ongoing growth in USA production, along with exemptions for non-members Nigeria and Libya, have offset those cuts to some extent.

The speed and scale at which USA shale production has bounced back from the slump in 2015/16 has confounded OPEC and all the other major forecasters.

"The outlook for oil hinges on the effectiveness of the Opec cuts relative to the supply increases from USA shale", said William O'Loughlin, analyst at Australia's Rivkin Securities.

Other reports by BadHub

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