Last Updated: August 20, 2017
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You could have been away for a summer break any time over the past three weeks and come back to find benchmark crude prices just where you left them. Low price volatility can be good for the consumer in general, but not if it is the calm before the storm. OPEC, despite its epic efforts to actively manage the oil market into equilibrium after three years of oversupply and growing inventories, may have been forced into a stalemate. While Brent is clinging on to the lower end of OPEC’s desired $50-60/barrel range, the top end seems to be slipping out of reach, even as the risk of a slide towards $40 grows. US production growth does not show any signs of slowing down, the latest EIA data shows, the deceleration in new rig deployments notwithstanding. Together with the supply growth from Libya and Nigeria, it is wiping out 94% of the pledged OPEC/non-OPEC cuts.

Crude has been stuck in a tug of war between equally compelling bullish and bearish signals for the past few weeks. This week’s reports showing another big drawdown in US crude inventories, neatly counterbalanced by a smart jump in the country’s crude production, further locked prices in a tight range, leaving Brent hovering around $50-51/barrel and WTI around $47-48/barrel.

What should be worrying about this seeming impasse for OPEC is that there is also a clear downside bias to crude, as a continued decline in US crude stocks at the feverish pace seen since April this year looks unlikely beyond the summer peak demand season, while expectations of a persistent global supply glut have taken a firm hold.

It is hard to fathom the possibility of the market rebalancing while almost 94% of the 1.72 million b/d of pledged OPEC/non-OPEC production cuts are being wiped out by increases from the US, Libya and Nigeria. And the higher end of OPEC’s target range of $50-60 has begun to look remote.

OPEC has been pushed into a corner and could well remain there for as long as it opts to play the waiting game — believing that it is only a matter of time before OECD

inventories drop down to their five-year average level. OECD oil stocks, aggregate of crude and refined products, declined by an average of 200,000 b/d in the second quarter, according to the International Energy Agency’s latest estimates. At this rate, the surplus at the end of June to the current five year average — pegged at 219 million barrels by the IEA— would take three years to mop up, not accounting for changes in the moving five-year average. That is a long time in the oil market.

Meanwhile, the short-term view on oil consumption growth helping erode excess inventories has also soured, as we approach the end of the summer holiday travel-induced bump in gasoline, diesel and jet fuel demand across the globe. A second successive weekly build in US gasoline stockpiles, even if a modest one, and a 275,000 b/d or 2.8% dive in gasoline consumption in the week to August 11 drove home that realisation, capping crude’s gains from the massive 8.95 million-barrel draw in the country’s crude stocks.

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