If you look at data from the American Petroleum Institute (API) you will see that it is obvious that OPEC/non-OPEC production cuts are starting to have an impact on U.S. oil inventory. The API not only reported a whopping 8.67-million-barrel drawdown in oil inventory last week, they also reported that over the last 5 weeks there has been a drop of over 19.277 million barrels. Now I know what you are thinking. Many believe that the Energy Information Administration (EIA) data that we get later today is the only data that matters. Yet even in the EIA data we have seen U.S. crude supply fall for 7 consecutive weeks and during the same time, over 5 weeks we saw U.S. oil inventories fall by almost 16 million barrels. If today the EIA reports a similar 8 million barrel plus draw down, the market perception that OPEC/non-OPEC cuts are not working will be put to rest.
Not only will that be proof that the cuts are working it will also call into question those that say the resolve of OPEC and non-OPEC nations to follow through on cuts is lacking. Everyone that has said that OPEC and non-OPEC would cheat on cuts have been wrong. In fact, the latest data from Reuters shows the compliance rate improving among almost all the nation’s participating in the agreed upon cuts. In May there were 11 members that agreed to cut and reduced production by 1.108 million bpd of the pledged 1.164 million bpd. That equates to 95 percent compliance, up from 90 percent in April according to Reuters. Still, overall production by the cartel did rise by 250,000 barrels a day because of increased output by Nigeria and Libya who now are not bound by a quota. The larger point is that a compliance rate by OPEC of 95% is historic and based on recent U.S. data, is starting to drawdown inventory in the U.S..
Yes, it is happening even with the rise in U.S. shale production. Last week’s API draw is almost the equivalent of one day of U.S. production including shale and non-shale sources. So, to make up for this week’s deficit, we may have to add another day in the week. The EIA data, if it confirms the large drop, may start to change the direction of the market to the upside again as we enter the new month. Hedge funds that dumped yesterday because it was the end of the month may have to start getting back in or miss what could be an oil price recovery.
The drawdown also gives credence to Saudi energy minister Khalid Al-Falih proclamation that the goal of getting the global oil market in balance will be reached in the very near future. Now while we are still working off the massive crude builds we saw earlier in the year as OPEC oil was still coming in and oil released from floating storage and Strategic Petroleum Reserve sales, the trend of falling supply really is going to get hard to ignore. The Saudis said they will do whatever it takes to get the market in balance and despite the disappointment following the output cut extension, it seems what they are doing now is starting to work. This comes even as the petroleum minister of Nigeria, Emmanuel Ibe Kachikwu, said that OPEC will not allow U.S. shale drillers to “sabotage” the production cut agreement that the cartel extended by nine months last week at their Vienna meeting. So there!
Supply for Cushing, Oklahoma was also down 700,000 barrels and gasoline supply down 1.7 million barrels. We did see a slight 100,000-barrel uptick in distillate supply.
Natural gas stabilized as the market seems to have largely priced in cooler short-term weather forecasts and is looking at the heat of summer that is expected to follow. The EIA is reporting storage that is expected to see an injection of 77bcf.