Oil Prices Mixed on Growing Demand Outlook

Traders work on the floor at the New York Stock Exchange in Manhattan New York

"The EIA is forecasting USA oil production will lift 14.8% to 10.70 million barrels per day this year, before rising another 5.3% to 11.27 million barrels per day next year". This is less than the deficit of about 560,000 bpd implied last month. Similar to 2017, the OECD region saw an upward revision by 20 thousand b/d in the first quarter of 2018 amid solid initial data for OECD Americas. The switch to natural gas in Pakistan and Iraq's power sectors is responsible for a downward revision of 150 kb/d to non-OECD demand.

"If oil rig drilling proves uneconomical, we could see companies look to draw down on their DUC wells, keeping United States oil output higher for longer". Crude production is expected to reach nearly 33.5 mb/d in the second half of the year. Crude futures have moved in sync with equities uninterruptedly for the past 99 trading days, the longest such stretch in two years.

Indeed, stocks rose despite a jump in inputs to refineries. The base case projects growth of approximately three million BPD over the next five years. Oil reduced its decline after the industry report showed United States fuel stockpiles fell last week. The ICE Brent futures curve remains in backwardation.

Brent spot prices and spreads have essentially shown no net increase since the middle of December as the earlier rally has stalled (tmsnrt.rs/2HyJ1yX). It will ramp up to a new record in 2Q18 at 81.8 mb/d. A broader market slump initially drove prices lower, while surging American production and increasing inventories remain a challenge. New oil discoveries in 2017 hit a record low at only 4 billion barrels, which stands in stark contrast to the 36 billion barrels that were produced. Even so, the value of Brent crude oil is still averaging close to $67/bbl in 2018, which is about 20% higher than in the early part of a year ago.

Data from the American Petroleum Institute will be released at 4:30 p.m. on Tuesday, and is expected to show a build US crude inventories for the third straight week. Meanwhile, stockpiles at Cushing were little changed, according to data compiled by Bloomberg.

He added that the company had reduced production at some fields and expected domestic output to decrease gradually.

On the demand side, OPEC revised higher its expectations. Our estimate for February shows output down again, by 60 kb/d. The risk, of course, is that such strong production growth leaves little room for other producers around the globe to increase production.

NCAA women's hoops tournament: UConn could play in Albany
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"Libya is holding onto its recent gains", the IEA said. Taking OPEC as a whole, quota compliance in February was 147%, but even if Venezuela's production were at its allocated level, the group's compliance would still be close to 100%.

Not all market indicators were bearish, however.

On a monthly basis, the producer price index that measures wholesale inflation was up 0.2% following January's 0.4% increase.

There is little enthusiasm among business leaders and investors for increased tariffs, tougher restrictions on investment and "de-globalisation". Similar to previous years, Canada remained the largest destination for US crude oil exports, but Canada's share of total USA crude oil exports continued to decrease, down from 61% in 2016 to 29% in 2017.

Yet, it should become very clear that US oil production is not keeping pace with near record demand growth as global oil production decline rates.

"The rising tensions between the West and Russian Federation raise the potential for reduced trade flows and economic activity, which would diminish energy demand growth", said John Kilduff, partner at investment manager Again Capital in NY.


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