Despite disruptions, massive global crude oil supply overhang exists

Crude oil prices collapsed from $100 two years ago in a drop that deepened after the Organization of the Petroleum Exporting Countries (OPEC) refused to cut output, hoping lower prices would curb rival supply especially US shale and other non-conventional oil. With signs that the strategy is working, OPEC have stuck to the output policy.

The price drop is hitting non-OPEC supply as companies have delayed or cancelled projects around the world. OPEC forecasts supply from outside producers will decline by 740,000 bpd in 2016 led by the United States, unchanged from last month.

Shutdowns in Nigeria, Libya and Canada further tightened the oil market bringing supply and demand more closely into alignment earlier than many had expected, thereby, bolstering prices. However, OPEC has cautioned that despite the supply disruptions, “there is still a massive global supply overhang.”

Oil glut may shrink second half of year

OPEC forecasts that the world oil market will be more balanced in the second half of 2016 as outages in Nigeria, Libya and Canada help to speed up the erosion of a supply glut. The oil cartel pointed in a monthly report to supply exceeding demand by just 160,000 barrels per day (bpd) in the second half. It will be noted that a surplus of 2.59 million bpd in the first quarter sent prices to a 12-year low.

OPEC supply had been climbing since the 2014 policy shift, reaching its highest since 2008 in April. But output fell by 100,000 bpd in May to 32.36 million bpd led by Nigeria, according to the OPEC report.

With demand for OPEC crude expected to rise to an average of 32.52 million bpd in the second half as non-OPEC supply falls and seasonal demand rises, OPEC’s report points to excess supply of 160,000 bpd if the group keeps pumping at May’s rate. They have also stuck with a forecast that world oil demand will rise by 1.20 million bpd this year.

Oil has risen to $50 a barrel from the 12-year low of $27 in January as the outages curb excess supply. The development according to OPEC is accelerating a tightening in the market it expected to happen anyway, as lower prices finally take their toll on higher-cost supply outside the group.

There are risks that oil prices will fall if production in Canada, Libya or Nigeria rebounds after supply disruptions in those countries. At current prices, US shale output will probably start recovering early next year.

The Brexit effect

Oil prices jumped about 4 percent as a weaker dollar and less anxiety about Britain’s possible exit from the European Union encouraged investors to buy riskier assets. Brent crude futures’ front-month contract settled up $1.98, or 4.2 percent, at $49.17 a barrel. The front-month in US crude’s West Texas Intermediate (WTI) futures rose $1.77, or 3.8 percent, to settle at $47.98.

Analysts say that while a British exit from the bloc, or “Brexit”, may not have a direct effect on oil, the market could suffer collateral damage. The ensuing turmoil could worsen sentiment for riskier assets such as commodities. Oil could also take a hit from a rising dollar, which analysts expect to strengthen if the UK votes to leave the EU.

The bullish outlook on the referendum’s outcome has helped crude prices to defy negative factors such as the resumption of oil production in Canada after wildfires and a further increase in the number of active rigs in the US.

Refiners hit three-year low

As crude oil prices rebound and many producers rally, US refiners are getting hit hard. Profits from processing crude into gasoline and diesel are narrowing as refiners confront the rising costs and a gasoline supply glut that is keeping prices at the pump cheap.

Refiners, which had benefited from soaring demand and cheap crude oil last year, now face a crude price rally of more than 85 percent from this year’s low, while gasoline stockpiles are at their highest seasonal level in 20 years. The uptick in oil prices has led investors to sell off refiners and shift instead to oil producers.

While the Energy Information Administration predicts gasoline demand will hit a new record this summer, inventories at a seasonal high have kept average pump prices at their lowest since 2005 for this time of year. Gasoline margins have declined to less than $16 a barrel, from more than $21 weeks ago.

FRANK UZUEGBUNAM