Published: Fri, July 14, 2017
Research | By Elizabeth Houston

Oil prices stabilize after supply declined last month

Oil prices stabilize after supply declined last month

Brent crude, the worldwide standard, was down 21 cents at $47.53 a barrel. "For fellow OPEC members, who agreed to reduce production by 1.2 million barrels per day, to see their cut effectively diluted by almost two-thirds must be very frustrating, especially as their pact has, hitherto, been well observed by historical standards", said the IEA analysts. Iran is the only member state that has room for production growth so it can regain a market share lost to sanctions.

That came despite a pledge by OPEC to curb production by about 1.2 million bpd between January this year and March 2018, while Russian Federation and other non-OPEC producers say they will hold back half as much. Furthermore, what is most surprising is that Mercuria is rumoured to be courting Argentinian shale oil and gas producer Andes Energia, revealing a new long-term approach to the oil market in the region. Another looks at the fiscal break-even price - or the magic figure at which oil producers can balance their budgets.

"The Saudis should be happier than Nigerians but a price below $60 per barrel is still a headache", he said. The additional supply from the U.S.to an already over-saturated oil market has often been blamed for plummeting prices.

It's a reversal of an historic trend. Without a further extension of the OPEC agreement, EIA would expect larger inventory builds and lower prices in 2018 than are included in this forecast.

A third measure paints a similar picture of a dramatic shift.

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Nevertheless, global oil inventories remain 266mn barrels above the five-year average with producers still finding it very hard to bring total inventories down.

But in terms of OPEC's participation in tackling the global glut, Bloomberg is of the opinion (shared by many) that even if it imposed caps on full-bore producers Libya and Nigeria, it still wouldn't be enough to rebalance the market substantially. Investors now demand higher yields and lower prices to get deals done, reports a Financial Times article, forcing energy companies to do more refinance-driven bond deals, where shareholders have restructured their equity holdings to a safer and more comfortable position. The break-even then surged during the boom period as imports climbed, to $80 in 2014. The latest effect of OPEC strategy is the 18% fall of oil futures since the beginning of the year.

Nigeria's output had improved in recent months, after the government managed to end militant attacks on oil pipelines in the Niger Delta by opening peace talks with leaders in the restive oil hub. India's International Olympic Committee bought its first sour crude oil cargo from the USA last week.

Libya's oil production has been depressed for nearly four years. "For most, better management of the economic challenges that come from oil-related volatility -- both the booms and the busts -- is a more realistic policy goal than diversifying the economy away from oil".

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