The Supply Glut in Crude Oil is Not Ending Anytime Soon
The supply glut that has crippled crude oil prices for much of the last two years is still very much in place and oil prices might not start going up anytime soon. Last week, global crude oil prices crashed into the $40’s range after hedge funds, investors, and other stakeholders started panicking about the prospects of oil.
Last Friday, the global Brent for June delivery declined a massive 2.30% to $51.77 per barrel and the West Texas Intermediate for June delivery declined by 2.52% to $49.43 per barrel. In the last one week, both the Brent crude and the West Texas Intermediate have declined by more than 7%. This piece seeks to identify the reasons behind the unending weakness in crude oil prices.
OPEC’s effort to end the supply glut might be futile
Last year, OPEC announced that it has worked out a deal between cartel members and some other oil-producing countries to end the supply glut in oil. In January, the cartel announced that it has recorded more than 80% compliance on the proposed cuts. However, recent market reports suggest that the production cut hasn’t done much to end the glut in crude oil supplies.
To start with, U.S. producers added new rigs for the 14th straight week according to a Baker Hughes report for the week ending April 22. In fact, U.S. rig count increased by about 40% in the first quarter compared to the same period in 2016. U.S. Shale oil production is also at its highest level since August 2015. U.S. oil producers are pumping out record volume of oil; hence, OPEC’s production cuts have not been able to do much to end the supply glut.
However, stakeholders within OPEC are leaning towards the possibility of extending the cuts into the second half of the year. A number of OPEC members are recommending an extension that will deepen cuts by 1.8 million barrels per day – we will know if OPEC will end or extend cuts when it meets on May 25.
Here’s what analysts think about the prospects of oil
Analysts have started weighing in on where they think the crude oil market is headed. As it is to be expected, there’s a mix of bullish and bearish sentiment on how the demand-supply imbalance in crude oil might pan out.