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Crude was a touch weaker in early trade this morning. The sell-off followed news that President Trump has proposed selling off half of the US’s 688 million barrel strategic petroleum reserve. The proposal is part of the budget which is set to be delivered to Congress today. There is currently a legally required minimum inventory threshold of 450 million barrels which would have to be tweaked first.  But if the sell-off were to go ahead it would take place between 2018 and 2027 and raise around $16.5 billion. The proposal is being viewed as a big vote of confidence in the ability of the US to ramp up future production. However, the prospect of more supply from the States comes just ahead of Thursday’s crucial OPEC meeting in Vienna. This is where OPEC, together with a number of significant non-OPEC producers, is expected to announce an extension to timetabled output cuts. Recent statements by officials from Saudi Arabia and Russia have suggested that next month’s expiry of the 1.8 million barrels per day production cut agreed at the last OPEC meeting could be extended by nine months to the end of March 2018. That would mean all affected parties agreeing to cuts lasting 15 months, rather than the original six.

On top of this timeline extension, Saudi Oil Minister Khalid Al-Falih is also hoping to persuade a couple of smaller oil producers to join in with the production cut agreement. This, he argued, would be enough to bring supply and demand back into balance by the end of the first quarter next year. There’s also been a suggestion that not only will the timeline for cuts be extended, but also the size of cuts, above and beyond 1.8 million barrels per day. However, it’s worth noting that the Kuwait Oil Minister has just said that deeper cuts have not been discussed. And while there’s a fair amount of consensus over a six-month extension, there’s some push-back against a nine-month one.

Putting all this together suggests that expectations are running high ahead of this week’s OPEC meeting. If this is all priced in, then there’s certainly scope for disappointment. In addition, US shale producers are continuing to boost production. Yesterday Goldman Sachs reported that the number of active drilling rigs is up by 404 over the past twelve months, or 128%. US crude production now comes in around 9.3 million barrels per day - a 10% increase from this time last year. And it’s likely that the US will continue to boost production, which means that the OPEC/non-OPEC countries involved in the output cut agreement will struggle to push oil prices much higher from current levels. As we can see from the weekly chart of WTI below there’s resistance around $54, and the last time oil has traded above $60 was just under two years ago. It currently seems unlikely that crude could maintain such high levels given the likelihood that US shale oil production will offset any extension to OPEC and non-OPEC output cuts.

Chart courtesy of Investing.com:

https://www.spreadco.com/assets/23.05.17pm1.png

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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