Oil Gains For The Day, But Drops Over 6% For The Week

The U.S. energy sector continues to show strength. Gulf producers need money to balance the budget. "I don't think they have many options".

What has proved to be a double whammy for OPEC is the fall in global commodity markets triggered by recent Chinese manufacturing surveys. Once that gave way, a key Fibonacci retracement and the low of the year were on the horizon, before paving the way to $45 a barrel.

In the meantime, some OPEC producers themselves raised production and exports in order to compensate for lower oil prices.

That's put the ball back in OPEC's court.

Oil prices rose on Monday on a growing conviction that an OPEC-led production cut initially scheduled to end in June would be extended to cover all of 2017, although a relentless increase in US drilling activity is seen capping gains.

While the group has implemented the curbs, a rebound in USA shale output and stubbornly-high stockpiles show the world's three-year crude glut isn't shifting. "Right now, it is all about supply and not demand".

Several other non OPEC countries, such as Russian Federation, agreed to follow suit for the first six months of 2017 in the hope that the fallen price may bounce back as reserves dwindled.

The liquidation of so many speculative long positions and establishment of fresh short ones should eventually help stabilise crude prices.

The closely-watched USA rig count-which comprises US onshore and USA offshore Gulf of Mexico drilling rigs - hit 971 in April, up 107 percent from previous year, according to Platts RigData. In fact, USA crude output is at its highest since August 2015 and has never looked back.

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And while actual production figures from OPEC members are lower, what's showing up on the market paints a different picture.

Interestingly, when Saudi announced a cut on "all allowances, financial benefits, and bonuses" for civil servants on September 2016, the crude was trading at around US$45 a barrel.

The five companies' net debt remains near an all-time high, having doubled to US$210bil over the last two years. Last week, stockpiles fell by 930,000 barrels in the week to April 28, less than half the decreased forecast by analysts. "This lack of faith seems to have dawned on the market", Smith said. At least part of the strength in United States commercial crude stocks is the result of the U.S. government selling oil from its Strategic Petroleum Reserves, ' said the analysis.

He said: "The price dipping below $50 in the North Sea means projects which were being examined will be looked at more closely".

After the cartel cut production, a 22 per cent bounce to a high of US$57.10 in January was erased partly as U.S. crude output and shale production rose.

So far compliance has been well above what was originally expected, but some countries are exempt while other producers, like Iran, have been accused of massaging their production numbers. "From here we see upside".

"The market viewed the fall as overdone", ANZ bank said on Monday.

"We expect fundamentals to improve over Q2, but the path to rebalancing may not be fully clear for the market without some data cleansing", said Miswin Mahesh, chief oil analyst at Energy Aspects, who expects Brent prices to average $63 this quarter. They jumped to about 24.3 million barrels a day in January, the month the deal was implemented.

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