(EnergyAsia, May 29 2015, Friday) — Crude prices have survived months of heavy selling pressure despite evidence of a growing glut since the start of the year. As Organization of Petroleum Exporting Countries (OPEC) ministers prepare to meet in Vienna on June 5, they will note with some satisfaction that prices have recovered by more than a third since hitting bottom in January, with no signs that crude is headed towards the US$20/barrel levels predicted by Goldman Sachs.
Both the cartel, namely Saudi Arabia, and its chief rivals in the US have refused to throttle back production in the race for global market. OPEC production is at its highest level in over two years while US shale operators have too much at stake to slow down now.
One year into the global oil price crash of 2014, Saudi Arabia appears to be winning the battle as US firms have drastically reduced rig count and slowing down production as marginal shale-based producers cannot compete with WTI trading below US$60 a barrel.
According to the International Energy Agency, US producers of light tight oil (LTO) appear to have blinked, reversing a multi-year winning streak and helping WTI prices to rise in April and May.
“US crude stocks, the top source of recent OECD builds, posted their first weekly draw in 17 weeks at the end of April,” said the IEA.
“Expectations that the market would start tightening by mid-year seem to be coming true – or so would have it the bulls who over the last month have given WTI crude a 14% price lift, and counting.”
Global oil stockpile continues to grow
But it’s too early for the Saudis to celebrate as oil prices remain under pressure from the continuing build-up in products’ stockpile in the developed economies and China, and rising global crude supplies.
“Preliminary data show OECD-wide product stocks stopped drawing and swung into growth in April. More such builds may follow as global demand goes through a seasonal soft patch and refining activity increases worldwide,” said the IEA.
Global crude supply was up by a staggering 3.2 million b/d in April year-on-year, extending the first quarter’s massive gains, due largely to non-OPEC production outside the US.
The IEA said Russian oil companies seem to be “coping exceptionally well” with lower oil prices and international sanctions, thanks to a flexible tax regime that lightens their fiscal burden as prices drop and to steep cuts in production costs that came courtesy of the rouble’s depreciation.
It estimates that Russian production surged 185,000 b/d year-on-year in April while even Brazil’s Petrobras has defied low prices with a 17% rise in year-on-year production in the first quarter.
The IEA said production in China, Vietnam and Malaysia have also been growing.
Finally, US shale-based producers are still very much alive. Following the recent surge in WTI price, the IEA said US operators have gained “a new lease on life” through their success at sharply reducing production costs. At the same time, producer hedging has reportedly gone steeply up, as companies took advantage of the rally to lock in profits.
The agency expects global demand to grow by more than 1.2% to 93.65 million b/d this year. Rising demand resulting from Europe’s improving economic outlook and projections for a cold winter will help offset the weaker outlook in the former Soviet Union, the Middle East and Latin America.