TORONTO: In a bid to stabilise crude markets, Saudi Arabia continues to bear the brunt of Opec’s quota output agreement struck in November last year.

As per the S&P Global Platts report, Saudi Arabia produced 9.98 million barrels per day in January, well below its quota of 10.06m bpd. Yet, Algeria, Venezuela, and Iraq continued producing more than their allocated quota. How long can Saudi Arabia continue to bear this burden remains a big if?

These are definitely not the best of times for crude markets. Last Wednesday, oil prices slid, after reports of a big increase in US crude inventories and a slump in Chinese demand.

The report implied that the global oil markets remain oversupplied, despite the Opec output cut.

The American Petroleum Institute on the same day reported the second-largest weekly inventory buildup ever in the history of records, at 14.227m barrel, versus expectations of a 2.38m barrel increase only.

Later the official EIA figures led the markets deeper into despair. The EIA reported a buildup of 13.8m barrels for commercial crude oil inventories in the US. Total US commercial inventories were reported at 508.6m barrels, above the upper limit for the season.

This led Goldman Sachs analysts to highlight that the ‘US gasoline demand fell sharply by 460,000 bpd year on year in January, and, that such declines were only previously (seen) during recessions.’

Questions are also being raised by the slowing demand growth in China. Beijing’s implied oil demand growth eased to 2.5 per cent in 2016, down from 3.1pc in 2015 and 3.8pc in 2014.

Yet the biggest impediment towards market stabilisation remains the growing US output. The EIA expects US crude production to grow by 100,000 bpd to 8.98m barrels this year, 0.3pc less than the previous forecasts. However, as per the EIA, the output is set to jump by 550,000 bpd in 2018.

Writing for Bloomberg Julian Lee concedes that so far, the Opec 10 have taken much bigger steps towards meeting their obligations than most analysts thought possible, yet the rising supply from those three Opec members, outside of the agreement, is offsetting the impact of the cuts by reducing the size of the overall reduction in Opec output to little more than 800,000 bpd.

An even bigger threat is the rising US supply. As per the preliminary data, it is already up by more than 400,000 bpd since October.

Daniel Yergin, the vice chairman of IHS Markit is also more confident telling CNBC, “We’re expecting this year to see US production probably increase from beginning to end by more than 500,000 bpd.” He added, “A dollar invested in 2017 (in US drilling industry) produces about two and a half times as much oil as a dollar invested in 2014, so I think even at these lower prices we’re going to see this recovery.”

As per Baker Hughes, US energy companies added rigs for a 13th week in the last 14, taking advantage of crude prices that have held mostly over $50 a barrel since Opec agreed to cut supplies late in November. Drillers added 17 oil rigs in the week to Feb 3, bringing the total count up to 583, the most since October 2015. During the same week a year ago, there were 467 active oil rigs. Drillers have added a total of 267 oil rigs in 32 of the past 36 weeks.

Analysts at Cowen & Co said in a note that its capital expenditure tracking also showed 31 exploration and production (E&P) companies planned to increase spending by an average of 36pc in 2017 over 2016,

following an estimated 45pc decline in 2016 and a 37pc decline in 2015.

Investors are also descending onto Permian Basin in West Texas and in hordes. “We could easily see an extra 100 rigs out here in the Permian by June,” Josh Clawson of Gesco, a Midland, Texas electrical contractor for oil drilling rigs was quoted as saying.

And though as yet, Opec does not appear to be too concerned. Yet the Iranian and the Qatari oil ministers conceded last week that Opec and other major crude-producing nations may need to extend output cuts into the second half of the year to re-balance the markets.

Ominous clouds are visible on the crude horizon and markets are beginning to take note of it.

Published in Dawn, February 12th, 2017