OPEC got a dose of bad news from EIA’s outlook on oil production, prices

A monthly report from the U.S. Energy Information Administration issued Tuesday fed concerns that OPEC’s efforts to rebalance the oil market are falling short—just weeks ahead of a key oil-producer meeting set for later this month.

The EIA forecast U.S. crude production at an average 9.31 million barrels a day in 2017, up 1% from the previous forecast, according to the U.S. government agency’s Short-term Energy Outlook report. It sees 2018 output at 9.96 million barrels a day, up 0.6% from the previous forecast.

“Increased drilling rig activity is expected to boost to U.S. crude oil production this year and next, with forecast production in 2018 averaging 10 million barrels per day,” said Howard Gruenspecht, the EIA’s acting administrator, in a statement.

The EIA has raised its 2018 crude-production estimate by roughly 6.5% since its initial forecast issued in the January report of 9.30 million barrels a day. The 2017 output forecast has climbed by about 2.4% from the forecast of 9.00 million in the January report.

The latest data come ahead of a meeting of members of the Organization of the Petroleum Exporting Countries set for May 25 in Vienna. They are slated to decide whether to extend the production-cut agreement into the second half of the year or, possibly, into 2018.

On Monday, Khalid al-Falih, oil minister for Saudi Arabia, OPEC’s largest producer, said the production curtailments under an agreement reached in late November are working. He also signaled that the reductions could be extended into 2018.

Growth in North American oil output will outpace OPEC’s this year and next.

The agreement between OPEC members and other major producers, including Russia, called for participants to cut 1.8 million barrels a day of their collective output.

But oil traders and analysts have worried about the effectiveness of the OPEC-led deal to bring supply and demand back into balance, given rising U.S. crude production, as well as the potential for higher output from non-OPEC producers who aren’t part of the agreement and some OPEC members who aren’t subject to quotas under the deal, such as Libya.

“The outlook for U.S. production continues to grow given the steady pace of growth in rigs and DUCs [drilled but uncompleted wells],” said Troy Vincent, oil analyst at ClipperData.

The number of active U.S. rigs drilling for oil rose last week for a 16th week in a row, according to Baker Hughes BHI, +2.78%  on Friday—implying that output is set to continue its climb.

“In recent months, the forward curve incentivized producer hedging, which will help keep future production insulated from potential price declines over the forecast period,” said Vincent.

Oil’s forward curve switched to contango a few weeks ago, according to Morgan Stanley, with prices for near by June futures contract trades at a discount to prices for contracts for delivery in later months.

“An OPEC output cut extension seems nearly guaranteed given the lack of draws to [Organisation for Economic Co-operation and Development] stocks that have been witnessed since December,” Vincent said.

But “an unintended consequence of the agreement that will continue to hit OPEC’s market share is that less Arab Gulf supply has led to a tightening of the Brent-Dubai/Oman [price] spread and for Dubai/Oman to trade at a premium to WTI,” he said. So “An extension will only further Asian demand for U.S. and Atlantic Basin crude.”

The EIA’s latest monthly report calls for OPEC oil supply at an average 39.43 million barrels a day this year and at 40.23 million next year.

Total world supply is expected to reach 98.47 million barrels this year and 100.40 million in 2018, the EIA said. World consumption, meanwhile, is seen at 98.30 million barrels a day for 2017 and 99.93 million for 2018.

The EIA’s Gruenspecht said “higher oil production from the United States, along with rising oil output from Canada and Brazil, is expected to curb upward pressure on global oil prices through the end of 2018.”

The EIA reduced its 2017 crude-price forecasts by 3%, with West Texas Intermediate crude CLM7, +3.79%  seen at an average $50.68 a barrel, and Brent crudeLCON7, +3.53%  at $52.60 a barrel. It left its 2018 outlook unchanged for WTI at $55.10 and Brent at $57.10.

On Tuesday, June WTI oil traded close to $46 a barrel on the New York Mercantile Exchange, while Brent crude fell under $49 a barrel on the ICE Futures exchange in London.

[Source:- marketwatch]