With the return of disrupted grades in Nigeria and several fields in western Libya, unplanned upstream outages fell to around 1.2 mb/d as of mid-last week, the lowest since early 2011—before the Arab Spring. Naturally, there was ample downward pressure on prices early last week.
The return of Libyan and Nigerian production means most of the bad news is now in the market and, on balance, the risk is now of rising disruptions. But given the current bearish tint to sentiment, further fuelled by Q1 17 US producer earnings calls guiding to higher US tight oil output, the market is concerned about various offsets to the OPEC cuts.
Saudi Arabia and Russia have attempted to pre-empt this by announcing their agreement to roll over the deal by nine months, rather than the six months that most in the market had been assuming. To an extent the market has forced OPEC’s hand—much like with the Fed and quantitative easing—to get prices to react positively, and the market may still need to see deeper cuts from the group later. As long as OPEC manages to reduce exports in line with existing production cuts from here, the scene will be set for the summer rally in prices.
And, we believe that OPEC will reduce exports more than they have done so far (and in line with output) helped by the seasonal upswing in crude burn—even though this will be lower this year due to new gas and fuel oil plants in Saudi Arabia—along with a slowdown in destocking. Indeed, by the start of May, Saudi crude stocks had fallen by 75 mb since November 2015. This is why Aramco has reduced crude exports to Asia by 0.25 mb/d in June, coinciding with Ramadan, as summer burn is rising. We expect Saudi crude burn to peak at 0.59 mb/d this year.
|Fig 1: Saudi crude inventories, mb||Fig 2: Saudi crude burn, mb/d|
|Source: JODI, Energy Aspects||Source: JODI, Energy Aspects|