When it comes to the oil market, the narrative over the past year, ever since OPEC’s first aborted meeting last April, has been just one: limit crude supply in hopes of rebelancing the oil market, reducing excess inventories, in the process sending the price of oil higher. However, echoing what we have warned for many months, overnight the world’s biggest independent oil trader said OPEC’s efforts could be in vain because the oil producing cartel is seeking to control the wrong thing: it’s not a matter of supply, but global demand which is simply not there.
According to Vitol Group, the world’s biggest independent oil trader demand isn’t expanding as much as expected, and U.S. shale output is growing faster than forecast, Bloomberg reports. As a logical outcome, that’s increasing the burden on the world’s biggest producers, who need to stick to their pledges to cut supply just to keep prices from falling, said Kho Hui Meng, the head of the company’s Asian arm. Meanwhile, shale continues to capture OPEC, and mostly Saudi, market share as do countries such as Iran and Libya which are not bound by the Vienna agreement production quotas.
But the biggest variable is demand, of which there is simply not enough: “What we need is real demand growth, faster demand growth,” Kho, the president of Vitol Asia Pte., said in an interview in Kuala Lumpur. “Growth is there, but not fast enough.”
“The oil market is looking for growth but there’s no growth,” Vitol’s Kho said, adding that the refiners may only get approval for the same volume of imports as last year. And while U.S. gasoline consumption is expected to hit its seasonal summer peak soon, demand growth “is not there yet,” he said.
And then there is shale.
“We’ve always talked about the call on OPEC, how much OPEC oil is needed to satisfy world demand,” said Nawaf Al-Sabah, chief executive officer of Kufpec, a unit of state-run Kuwait Petroleum Corp. “Now, in this new paradigm, it’s really becoming the call on shale. And the market is setting itself at the marginal cost of a shale barrel.”
As Bloomberg points out, U.S. output has jumped for 11 weeks through the end of April to 9.29 million barrels a day, the most since August 2015, Energy Information Administration data show. Furthermore, according to an EIA forecast released on Monday, US crude output for 2017 is expected to rise again, from 9.22MMbpd to 9.31MMBpd, and jump in 2018 from 9.9MMbpd to an all time high 9.96MMpbd.
According to a separate Bloomberg report, U.S. shale explorers are boosting drilling budgets 10 times faster than the rest of the world to harvest fields that register fat profits even with the recent drop in oil prices.Flush with cash from a short-lived OPEC-led crude rally, North American drillers plan to lift their 2017 outlays by 32 percent to $84 billion, compared with just 3 percent for international projects, according to analysts at Barclays Plc. Much of the increase in spending is flowing into the Permian Basin, a sprawling, mile-thick accumulation of crude beneath Texas and New Mexico, where producers have been reaping double-digit returns even with oil commanding less than half what it did in 2014.
Needless to say, that’s very bad news for OPEC and non-OPEC in the ongoing, and failing, global campaign to crimp supplies and elevate prices. Wood Mackenzie Ltd. estimates that new spending will add 800,000 barrels of North American crude this year, equivalent to 44 percent of the reductions announced by the Saudi- and Russia-led group.…
But the worst news for OPEC is that a new flood of oil may be imminent: “U.S. oil production is already swelling, even though output from the new wells being drilled won’t materialize above ground for months.” In other words, “in a few months” expects a whole new wave of shale oil to hit markets.
It is unclear how long the shale strategy can continue: drillers can afford to be sanguine despite oil’s recent tumble because they’ve cushioned themselves with hedges, Martin said. Hedges are financial instruments that lock in prices for future output and shield producers from volatile market movements.
“There is some price malaise creeping in,” Martin said. “But the aristocracy of the U.S. independents have insulated themselves” through hedging.
Full article: “There’s No Growth”: World’s Largest Oil Trader Has A Stunning Warning For OPEC (ZeroHedge)