Faltering demand joins supply glut to push oil prices even lower

OPEC's move could have backfired as the oil inventories have remained high in the US.

Oil - US Crude: Retail trader data shows 84.9% of traders are net-long with the ratio of traders long to short at 5.63 to 1.

USA producers have ramped up more quickly than most were anticipating, undermining some of OPEC's efforts. The supply response was wrong and instead of cutting in the summer of 2014, OPEC made a decision to rollover the 30 million barrels per day (bpd) ceiling.

The oil stock is high, higher than what it was when the oil organization had started its production cuts and supplies.

"It's not good news for OPEC", said Warren Patterson, commodity strategist at ING Bank NV.

The US government's Energy Information Administration has raised its forecast for domestic output growth in 2017 to 460,000 bpd from a predicted decline of 80,000 bpd in December. The largest increase is expected from Brazilian and OPEC production increases in the second quarter of 2018.

US gasoline inventories rose 2.1 million barrels in the week ended June 9, at a time when supplies should be declining seasonally, EIA data showed.

Energy services company Baker Hughes said on Friday that USA drillers last week added rigs for the 22nd week in a row, the longest such streak on record, implying that further gains in domestic production are ahead.

Meanwhile, traders will also continue to pay close attention to comments from global oil producers for evidence that they are complying with their agreement to reduce output this year.

"Our first look at 2018 suggests that United States crude production will grow year on year. such is the dynamism of this extraordinary, very diverse industry it is possible that growth will be fasted", said the report.

Adding to the stress, OPEC said its production climbed the most in six months in May, as Libya and Nigeria revived output. If we draw comparisons between OPEC oil and USA shale oil, we find that sustainability is a major problem. The market-share strategy would have proved to be a balancing force for the market if OPEC learned how to stick to targets, an issue it is still dealing with today.

What could the Saudis do in the circumstances?

In 2014, cartel leader Saudi Arabia unexpectedly raised production even as prices fell. Meanwhile, JPMorgan slashed its forecast for next year by $10, anticipating "a substantial build in inventories" as US shale producers ramp up output. Imports also dropped in India. "It will make it look like inventories are really coming down". The level of output is more than double the average production rate of 2016, which was 0.39 million barrels per day. She said Saudi Arabia's energy minister has made clear that reducing US shipments was an option. Who can sustain and longer?

OPEC tried to lower production and creates oil shortage globally, helping oil prices go up. Oil prices refused to blow past $60 even after over90 percent compliance from the oil producers.

  • Zachary Reyes