ETF Securities Research Blog

Oil: US supply response to weigh on prices

While the market has greeted OPEC’s 90% compliance rate with its new quota with a lot of enthusiasm, we believe that rising US production will continue to weigh on oil prices and limit WTI oil to US$55/bbl in the first half of the year.

As oil prices have stabilised in the US$50-55/bbl region since December 2016, oil production in the US has surged. Rig counts in the US have risen 85% since the low was reached in May 2016. Gains in rig efficiency mean that the US can produce a lot more oil with less rigs in operation than in back in 2014.

rigs

Production in the US is now only 7% below the peak reached in June 2015, after production surged since October 2016.

production

US crude oil inventory is only 1% below its all-time high. The last time inventory was this high (September 2016), WTI was trading at US$45/bbl.

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With so much faith placed on the OPEC/non-OPEC deal to cut output, we fear that the market is set up for disappointment. Speculative positioning on NYMEX WTI futures contracts is more than 2.5 standards deviations above its historical average. Compliance with quotas often starts strong and deteriorates as time goes on. While Russia has cut oil production and therefore has complied with its deal with OPEC, it aims to increase exports, offloading existing stocks. With seasonal low demand in Saudi Arabia, we believe that exports from the country could also remain strong despite productions cuts that more than meet the quota requirement. In 2016 Saudi Arabia exported record levels of oil (7.65 million barrels per day).

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