Oil prices have been firm for the last few weeks on hopes that oil producers would cut production enough to bring supply and demand back into balance. That sentiment was helped this week when Russia’s Energy Minister said that “a critical mass” of oil producing countries, accounting for 73 percent of the world’s oil output, had agreed to hold production at January levels. What the Minister did not say was that the 73 percent included only countries that did not have the capability or intention of increasing production significantly in the immediate future. The other 27 percent includes production from countries such as Iran, Iraq, Libya, and the US which are planning significant production increases this year or certainly will if prices rebound a bit.
On Wednesday prices gyrated when the EIA said that US crude stocks rose by 10.4 million barrels last week; it was reported that some 50 tankers were waiting to unload at Rotterdam, Europe’s largest oil storage terminal; and that stocks at Cushing, Okla. rose to 66.3 million barrels, or 90 percent of capacity last week. Even the news that oil stocks continue to grow rapidly was not enough to hold back speculators who traded oil up to close Wednesday at $34.66 in New York and $37.20 in London. In the US, some shale oil producers are saying that if prices get above $40 a barrel again, they will resume some additional production, which would likely drive prices down again.
Some analysts continue to hold that another down leg in oil prices is in the offing due to lack of storage space for the growing glut of petroleum. The news from Cushing and Rotterdam this week certainly adds support to this contention. Some note that even a rebalancing of the oil markets in the next year or so would still leave the world with roughly a billion barrels of excess crude in storage to be worked off before prices could increase significantly. The IEA announced on Tuesday that oil prices “appear” to have bottomed out, but the Agency expects that any increase in prices will be slow.
US crude production has declined from 9.7 to 9.1 million b/d in the last year. Statements by shale oil drillers and the continuing decrease in the US rig count suggests that an additional drop in production is coming in the next few months.
OPEC production fell slightly in February due to the closure of the export pipeline from Kirkuk and Kurdistan to Turkey which is now in its third week. Bad weather slowed exports from southern Iraq and Iran seems to be having trouble getting its exports moving as fast as it had planned.
Manufacturing in China declined sharply in February. However, the week-long national holiday likely contributed to the drop. Overall Chinese economic activity is at the lowest level since the global financial crisis eight years ago. Moscow too had a bad February with the purchasing managers index falling for the third straight month.
Saudi Arabia’s foreign assets fell by $14 billion in January, the third month in a row that the decline has been more than $10 billion. With assets now at $594 billion, another three to four years of decline at this rate will leave Riyadh with very little in reserve and mounting debts. The smaller countries in the Gulf Cooperation Council also will have a problem with $94 billion in debt coming due in the next two years. These countries are expected to run deficits amounting to $395 billion during the period which will further complicate refinancing. These deficits are a problem for Asia as the Arab states have traditionally invested a significant share of their excess funds in Asian property and securities.