EC Crude Oil Prices And Current Market Dynamics

The surge in U.S. tight oil supply from about 44 thousand barrels per day (bpd) in 2006 to about 1.7 million bpd in 2014 accounted in the main, for the massive global crude oil supply imbalance that exceeded 2 million bpd in 2015. Global crude oil prices plummeted from more than US$110 per barrel in 2Q 2014 to just under US$30 per barrel in 1Q 2016. The production accord reached in November 2016 between members of Organization of the Petroleum Exporting Countries, OPEC, and other oil producing countries, twenty-four in all, was aimed at reducing that imbalance by reining-in about 1.8 million bpd of production.

Crude oil prices have risen by more than 150% since then, reaching near four-year highs over the past few days and even the two largest producers, Saudi Arabia and Russia have been talking up a rollover of the production cuts.

Fundamentals

OPEC, over the years, had difficulty with adherence to production quotas and so there were initial concerns about the ability of participating members to meet reduction quotas as provided for in the accord. Those concerns proved unfounded as aggregate compliance in March stood at 163% according to the International Energy Agency, IEA. The compliance rate for participating non-OPEC producers was 90%. The production accord eliminated 2.4 million bpd from the global output.

This high compliance rate may have been boosted by accidental or unintended supply cuts. For example, socio-political unrest in Venezuela, a member of OPEC boasting the world’s largest proved oil reserves, saw production in that country fall to a near thirty-year low, lopping off about 580 thousand bpd in March over year-ago levels. The net loss was about six times the country’s reduction quota provided for in the accord.

Angola presents another example. Since the peak output at about 1.9 million bpd in 2008, production has been declining due mainly to underinvestment in offshore fields as well as high decline rates associated with the producing formations.

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