Reports showing a significant uptick in oil inventories in the United States sent prices for West Texas Intermediate crude tumbling below $50 per barrel March 9, the first time they have fallen below that threshold since OPEC producers agreed to production cuts. Given the factors that led to the supply bump, however, the prospects for a sustained selloff are unlikely.
In its weekly assessment, released March 8, the U.S. Energy Information Administration estimated that the U.S. crude inventory rose by 8.2 million barrels, a larger increase than had been expected. Several factors, including cyclical maintenance that has reduced global refinery capacity and a modest increase in U.S. shale production, contributed to the supply bump. Flows from U.S. shale plays have gone up 140,000 barrels per day (bpd) since countries both in and outside OPEC began trimming production in January, but that amounts to only a fraction of the almost 2 million bpd that OPEC estimates its cuts have taken off the market. And unless prices recover substantially, shale recovery is likely to remain modest, falling far short of the amount taken offline by OPEC.
Currently, many OPEC fields are in the middle of maintenance, helping depress production (in fact, the Abu Dhabi National Oil Company has notified its customers to expect cuts because of its maintenance). Whether the high rates of compliance with OPEC production cuts, estimated by the cartel as 140 percent of the agreed amount for among OPEC members in February, continue when the maintenance cycles are complete is a bit of a wild card in looking at future supply. The question of whether another production cut agreement can be forged is another.
Saudi Energy Minister Khalid al-Falih has said global crude inventories have not fallen as much as he would like, hinting that Saudi Arabia might be open to extending the production cut deal when the topic comes up in May. Increased production in Libya and Nigeria, which are exempt from the OPEC deal, has added to the global supply. But Libya's production of about 650,000 bpd could take a hit if Khalifa Hifter, field marshal of the Libyan National Army, tries to retake the As Sidra and Ras Lanuf oil terminals. Those were wrested from his army's control on March 3 by fighters from the Benghazi Defense Brigades, a jihadist-linked militia. Fighting could damage the terminals, leading to a longer-term reduction in the country's output.