The eight OPEC+ nations that contributed to voluntary production cuts are set to meet on Friday to discuss production strategy for July. Commodity strategists at Standard Chartered have predicted that we are likely to see more of the same, with the group adding another 411 thousand barrels per day to July targets and cumulative unwinding now clocking in at 1.4 mb/d. Interestingly, the analysts have reported that the increase in targets has not translated into the expected large increases in OPEC+ output, partly because the increase simply lowers the degree of the overshoot above targets for overproducers and partly because of production headwinds in some countries. StanChart estimates that OPEC+ total crude output in March clocked in at 40.99 mb/d, the last month before the unwind began, set to rise to 41.90 mb/d in July, assuming the 411kb/d increase goes ahead. In other words, the group will effectively add just 905 kb/d to daily output despite the 1.4 mb/d relaxation in targets. More importantly, StanChart has forecast that global markets remain broadly balanced in the second and third quarters of the current year, even in the event the last tranche of voluntary cuts is finally unwound by the end of Q3.
StanChart expects the call on OPEC+ (measure of excess demand) crude oil and inventories to average 42.1 mb/d in the third quarter, 1.9 mb/d higher than in the first quarter and higher than the average Q3 OPEC+ crude oil output of 42.1 mb/d. The analysts have also projected that global demand will increase by 1.17 mb/d y/y in 2025. Whereas some analysts have cut 2025 demand growth forecasts to below 0.4 mb/d, StanChart says they are yet to see anything in either the flow of global demand data or in economic projections to justify such low projections. On a more bearish note, StanChart has warned that, while unlikely, the eight OPEC+ producers could decide to accelerate the unwinding clip to more than 411kb/d if the worst overproducers (Kazakhstan and Iraq) fail to scale back production as earlier agreed. However, it’s more likely that the group will stick to its current trajectory given that market sentiment has not been overly dampened by the May and June increases.
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Still, StanChart notes that bearish sentiment still rules oil markets, with counter-seasonal or larger-than-normal inventory builds across a wide range of crude and product categories being the latest negative catalyst. According to the latest EIA weekly data, crude oil inventories increased by 1.33 mb w/w to 443.16 m, cutting the deficit to the five-year average of 26.31 mb. Gasoline stocks also showed a counter-seasonal build, adding 0.82 mb to 225.52 mb. Demand numbers were likewise soft, with implied gasoline demand clocking in at 150 kb/d lower w/w at 8.64 mb/d, taking the y/y decline for May to 7.2%. The implied demand for jet fuel and distillates has also been weak, with y/y declines of 7.4% and 4.0%, respectively.
With oil prices significantly lower than a year ago, it’s hardly surprising that oil producers are less eager to drill. According to the latest Baker-Hughes survey, U.S. oil rig count fell by eight w/w to a 42-month low of 465, good for 32 rigs lower from 12 months prior. The Permian Basin has been hardest hit, reporting a fall of 25 rigs so far in the current year and a y/y decline of 33 rigs. In contrast, the main source of drilling growth over the past year has been Granite Wash, with rig count increasing by 12 y/y. The Granite Wash is a liquids-rich tight sands play covering parts of the Texas Panhandle and Western Oklahoma.
And now Wall Street says the Permian decline is bullish for oil markets. According to Goldman Sachs, the ongoing slowdown in drilling activity in the Permian Basin is likely to provide support to crude oil prices. GS notes that total U.S. rig and frac spread counts fell 14% and 22% from a year ago, respectively, signaling a decline in tight oil production. The decline is quite alarming considering that the Permian Basin boasts the lowest breakeven costs for shale oil thanks to the use of cheaper and more efficient production techniques such as horizontal drilling. Goldman says other U.S. shale regions with higher breakeven costs are facing even more pressure to scale back amid persistent low oil prices.
By Alex Kimani for Oilprice.com
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