Oil extends advance as U.S. stockpiles drop first time this year

The growing consensus that the Organization of the Petroleum Exporting Countries' (OPEC) oil cutback initiative isn't working has been met by OPEC members insisting that their efforts combined with rising demand will result in a market rebalance - but a new forecast from the International Energy Agency says demand is in fact slowing. Recent reports show that oil production from USA shale producers will increase in April, according to the Energy Information Administration.

OPEC agreed on November 30 it would cut 1.2 million bpd during the first half of 2017, and on December 10 that non-OPEC producers would cut about 600,000 bpd from their output.

Saudi Arabia, the de facto head of OPEC, has boasted of its lead position among member states cutting production.

The U.S. oil rig count rose by 14 to 631 rigs, the highest level since September 2015, according to data published Friday by Baker Hughes Inc.

While the first inventory reduction in 10 weeks will help narrow the year-over-year storage surplus, the USA still remains awash with excess oil.

Distillate stockpiles, which include diesel and heating oil, fell by 4.2 million barrels, versus expectations for a 1.7 million-barrel drop, the EIA data showed.

The U.S. government reported crude oil production of 9.1 million barrels per day for the week ending March 10, up 21,000 barrels per day from the previous week and 41,000 barrels per day year-over-year. We believe that unless all producers come fully on board to implement their quotas, oil prices could remain under pressure as other factors are outweighing the supply cuts. Libya's oil output is also edging higher and is close to 0.70 million bpd. That reassurance may stem a further slide in crude for now, but may not be enough to put the more the $4/barrel knocked out of Brent and WTI in a rout that began on March 7. Brent crude was flat at $51.72 per barrel. "Unless OPEC agrees to extend its self-imposed production restraint beyond the June deadline, any claims of victory in the battle against the oil glut will be premature", Brennock said.

Oil prices rose Wednesday, snapping a week-long losing streak, as a drop in USA stockpiles supported a rally from Tuesday's three-month lows. "Export volumes are still appearing in storage around the world and, as part of this, United States stocks are building", it says.

"Supply is still plentiful across the Atlantic basin as can be seen in the high arbitrage volumes targeting Asia", due in part to a boost in production in the Mediterranean region and Brazil, JBC analyst Eugene Lindell said.

Still, oil demand remains poised to overtake supply in the second quarter and start depleting global inventories, according to Goldman Sachs, which sees USA benchmark West Texas Intermediate topping $57 a barrel in three months.

"The OPEC cuts are real and are cleaning up the market", Citigroup analysts including Seth Kleinman wrote in a report earlier this week.

Prices have sunk, stockpiles ballooned and doubts about OPEC's effectiveness grown, yet Wall Street hasn't lost faith in oil's recovery.

"While OPEC has shown more cohesion than we expected, the problem has always been that free-riders benefit most from OPEC cuts, which makes the deal inherently unstable", Dan Smith of Oxford Economics said in a note to clients.

  • Zachary Reyes