US shale making a comeback at $50 a barrel dents crude oil market's outlook

By Harshal Barot
Oil prices ended lower for the fourth week in last five due to the overhang of inventories and consequent reduction of speculative long positions. While the compliance to output cuts has been nearly 100 per cent from the Opec side, relative non-compliance of Non-Opec coupled with steadily climbing US production is keeping prices under pressure.
The Opec and non-Opec meet over the weekend failed to show an agreement about extending the output cuts beyond six months and this could act as a price negative in the coming week.
WTI prices remain below the $50 mark and an attempt to rebound last week failed as US inventories posted an increase yet again. Inventories increased by ~5 million barrels last week to touch a new record high of 533.1 million barrels. US inventories alone have increased ~54 million barrels so far this year. If market balancing indeed has to start, we need to see a sustained drawdown in oil stockpiles. Until then, it will be difficult for oil prices to break higher.
We haven't seen any major drawdown in global inventories too this year and this is a big risk to prices going forward too. IEA data showed that crude stocks in the OECD nations rose in January for the first time since July by 48 million barrels to 3.03 billion barrels. This is more than 300 million barrels above the five-year average.
Naturally, oversupply worries continue to dent oil prices. Opec producers have implemented 100 per cent of the agreed cuts as per latest data with Opec figures reflecting a cut higher than expected. Opec's 11 members with supply targets cut output to 29.68 million bpd in February, 123, 000 bpd more than required by target. Production by all Opec members, including cut-exempted Nigeria and Libya, fell to 31.95 million bpd. Surprisingly, Saudi Arabia raised oil production to 10.01 million bpd from 9.74 million bpd in Jan. While Saudi's output is still lower than its target, a rebound in its production dented sentiment in the oil market.
The IEA was slightly more bullish in its forecast this month as it projects the market to attain a deficit in H1 unlike Opec which expects that to happen in the second half of this year. Both however expect the non-Opec output to rebound this year. Opec raised its 2017 non-Opec oil supply growth forecast to 0.4 mbpd (prev. forecast 0.24 mbpd rise). The IEA also expects non-Opec output to rise 0.4 mbpd to 58.1 mbpd in 2017. The non-Opec part of global supply is the bigger worry for the market at the moment. Russia hasn't cut output as per the agreed terms with February production unchanged from January at 11.1 mbpd. Overall Non-Opec compliance is only ~64 per cent so far which has muted the impact of Opec cuts as well. Given that Libya and Nigeria are exempt from cuts, a rebound in their production will also increase Opec output even if other members stick to their quotas.
The bigger headwind to prices is also the re-emergence of shale output. US oil rig count has been increasing since June and is now at its highest since September 2015. US oil rigs are up by 336 since the low in May 2016. Weekly data from EIA shows that total US oil production is ~9.12 million bpd and latest EIA forecasts show that oil production could average 9.2 million bpd this year. EIA forecasts show that US shale oil production is expected to rise again in April by 109, 000 bpd to 4.96 million bpd suggesting that shale is surely making a comeback at this level of oil prices.
Looking ahead, given the stubbornness of global supply and inventories, excessive long positions in the market that we saw in the first two months have started to liquidate. Long positions are down nearly 20 per cent from their peak and we have seen a fresh built-up in short positions implying that the downside in price could extend further. Adding to that, global risk sentiment has taken a hit following the failure of the health-care reform in the US and has compounded the selling pressure on oil.
The technical picture remains weak and further downside cannot be ruled out. MCX Crude Oil consolidated in a lower range last week after the fierce sell-off seen earlier. Price now faces immediate stiff resistance near Rs.3250 and short-term bias remains negative below the same. Breach below Rs.3080 would intensify the downward pressure extending the decline towards lower support at Rs.2970-2960 zone. Selling on rallies towards resistance or on breach of support is thus advised.