Oil ebbs from 2015 high; OPEC reports jump in output

NEW YORK — Global oil prices edged back from a 2015 high on Thursday as traders took some profits from a weeks-long rally and the Organisation of the Petroleum Exporting Countries (OPEC) reported a sudden surge in March production.

US crude retraced some of the previous day’s nearly 6 per cent gains that followed government data showing the smallest weekly inventory build since the week ending January 2, suggesting that months of oversupply may be starting to ease.

But on Thursday, OPEC said in its monthly report that its own output surged by 810,000 barrels per day (bpd) in March, even as low prices start to weigh on US production.

Brent crude for June delivery fell 49 cents to $62.83 a barrel by 1606 GMT, after opening at $63.29, posting a front-month Brent peak price for the year.

The June contract settled the previous session at a $3 premium to the May Brent contract, which expired on Wednesday.

US May crude fell 57 cents to $55.82, having dropped to $55.07 intraday.

“There is some profit taking, but the confirmed OPEC production increase... has to weigh on prices to some degree,” said John Kilduff, partner at Again Capital LLC in New York.

Brent’s premium to US crude was back above $5 a barrel, now comparing June contracts, after the spread narrowed to $3.34 intraday on Wednesday.

Disappointing US economic data also helped pressure oil. US housing starts rose far less than expected in March and permits recorded their biggest drop since last May, while initial jobless claims rose last week.

Wednesday’s data showing the small build in US crude oil stocks followed reports indicating production in the United States, including in shale play powerhouse North Dakota, was beginning to pull back as the price retreat since June weighs on producers.

Talks between OPEC and other major producers triggered speculation about deals to cut production and supported oil prices on Wednesday, though most analysts said an agreement was unlikely.

Reuters technical analyst Wang Tao told Reuters Global Oil Forum that Brent could rise towards $70 a barrel in the near term, but that a sharp downturn could happen after that.

Separately, the International Energy Agency (IEA) on Wednesday cut its supply forecast for non-OPEC countries, citing downturns in North America and the “worsening conflict” in Yemen.

The Paris-based agency cut its 2015 forecast for non-OPEC output by 120,000 bpd to 630,000 bpd “on the back of a slightly more negative outlook for the US LTO (light tight oil) production and Canadian non-oil sands output, and of the fallout from the worsening conflict in Yemen.”

“According to our latest estimates, fighting in Yemen has halved production to about
60,000bpd in April, from an already depressed level of roughly 120,000bpd,” the IEA indicated in its monthly report.

Although Yemen is a small oil producer accounting for a fraction of global output with negligible effect on prices, it borders Saudi Arabia and affects other Gulf markets.

“Recently launched Saudi air strikes, while not targeting energy infrastructure directly, have led international oil companies active in the country...  to practically halt operations and pull out expatriate staff,” the report said.

“The start of a Saudi-led military campaign against Yemen in late March sparked concern of possible supply disruptions through the area’s vital sea lanes,” it added.

In North America, the IEA cited “signs that US LTO production month-on-month growth will grind to a halt as early as May”, and noted a “continued drop in the number of oil rigs... reductions in capital expenditures, and a credit crunch among LTO producers in the US”.

In Canada, the IEA pointed to “falling drilling rates and an increasing backlog of uncompleted wells”.

Even though oil prices have more than halved in just six months, the OPEC oil group has refused to cut its supply volume. 

Analysts believe this is because the organisation wants to use cheaper prices to force new US shale producers off the market.

The effects of plunging oil prices on demand and supply will continue to leave the market out of kilter, the agency predicted, saying: “In some ways, the outlook is only getting murkier.”

Notably, it said uncertainty persists over whether and when Iran will regain its status as a key player, since the international deal curbing Tehran’s nuclear programme is yet to be finalised, the deadline is June 30, and the speed at which sanctions against Daesh will be lifted is unclear.

While Iranian Supreme Leader Ayatollah Ali Khamenei says all sanctions must be removed immediately upon a final agreement, Washington wants them to be lifted gradually.

Iran back by 2016

In any case, the breakthrough in negotiations “may already have encouraged other producers to hike supply and stake out market share ahead of Iran’s potential return”, the IEA said, adding that the industry consensus was that “significantly higher volumes” of Iran oil will be flowing back into the market in 2016.

Iran is itching to return to OPEC’s number two slot after Saudi Arabia as soon as sanctions are removed, the agency remarked.

“Billions of dollars worth of spending on its vast oil fields could enable Tehran to boost capacity to around 4 million bpd towards the end of the decade,” the report indicated.

It noted that the ink was not yet dry on the framework agreement when Tehran sent a high-level delegation to China for talks on oil sales and investment opportunities.

The IEA also raised its forecast for world demand by 90,000 bpd to 93.6 million bpd.

It attributed “the notable acceleration” on 2014’s 700,000 bpd growth to cold temperatures in the first quarter of this year “and a steadily improving global economic backdrop”.

Elsewhere, Russia has been holding active, “unprecedented” consultations with OPEC, a senior  official said on Wednesday, a clear signal of Moscow’s strive for higher oil prices.

Russia has stepped up contacts with OPEC after oil prices plunged last year, however it has dismissed any suggestion it might cut output to prop up prices, saying it is technically impossible to idle production due to the harsh climate in Siberia, the heartland of Russian oil production.

Russia, one of the world’s top oil producers, expects its economy to shrink by 3 per cent this year, following an almost 50 per cent drop in oil prices since their $115 per barrel peak in last June.

The fall in price of oil, which together with natural gas account for over a half of Russia’s state budget revenue, has been compounded by a refusal by OPEC and its kingpin Saudi Arabia to cut output.

“The Russian energy ministry has been in consultations with  OPEC and Latin America countries, the recent consultations have been unprecedentedly active. This work should continue,” Deputy Prime Minister Arkady Dvorkovich told a meeting at the energy ministry.

Alexander Novak, Russia’s energy minister, told reporters he had spoken to OPEC Secretary General Abdullah Al Badri several days ago.

“On the whole, we are in a dialogue, it has been formalised. As you know, we meet twice a year, discuss the perspectives for oil market development. We discuss various issues, local [issues], the ones which relate to shale oil production, oil refining, tax changes in different countries,” he said.

But an OPEC delegate from a Gulf oil producer poured cold water on Moscow’s statements on cooperation.

“The Russian comment does not mean a joint cut in production. It just means that there is concern over price, but in the end, there might be no action taken,” the official said.

Another Gulf delegate dismissed the idea of a joint cut.

Last month, Russia’s Novak told Reuters he would meet OPEC in June to discuss the impact of shale oil on global markets,  days before the group decides whether its policy of high output is sufficient to stifle the US energy boom.

Saudi state news agency SPA reported on Tuesday that Saudi Arabian Oil Minister Ali Al Naimi discussed oil markets with Russia’s ambassador to Riyadh, Oleg Ozerov.

OPEC’s headquarters in Vienna had no comment on Wednesday.

In November, Russia said after meeting with a number of OPEC ministers that it would not cut output even if prices fell below $40 per barrel. Novak said the current oil price of $60 per barrel was comfortable for Russian producers.

OPEC has been annoyed by the Russian position and has said it will not cut its production unless non-OPEC producers make similar moves first.