OPEC compliance with its November output cut agreement remains significantly strong, yet question marks are appearing on the global crude horizon. As per S&P Global Platts, OPEC members cut their output by 1.14 million barrels per day in January – from October levels, achieving 91 percent compliance with the agreement. However, in order to achieve this, Saudi Arabia, Kuwait, and Angola seem to be over complying, compensating some other OPEC members who appeared lacking in their compliance. As per the report, Saudi Arabia produced 9.98 million bpd in January, well below its allocation of 10.06 million bpd. Yet, Algeria, Venezuela, and Iraq continued producing more than their allocated quota. And though Iraq cut its output by 150,000 bpd from December, yet as per the report, its January output of 4.48 million bpd was well above its quota of 4.35 million bpd. How long would Saudi Arabia continue to bear the burden of others - remains a big if - while, in the meantime, markets are also grappling with rising US inventory and output levels? Last Wednesday, oil prices slid, after reports of a big increase in US crude inventories and a slump in Chinese demand appeared. The report implied that global oil markets remain oversupplied despite the OPEC-led efforts to cut output. The American Petroleum Institute on the day, reported the second-largest weekly inventory buildup ever in the history of records, at 14.227 million barrels. This was against the expectation of a mere 2.38-million-barrel increase in inventory. Later the official EIA figures led the markets deeper into despair. The EIA reported a build-up of 13.8 million barrels for commercial crude oil inventories in the US. The total commercial inventories were reported at 508.6 million barrels, above the upper limit for the season. Commenting on the data, Goldman Sachs analysts said it pointed to "US gasoline demand falling sharply by 460,000 bpd year on year in January, with such declines only previously (seen) during recessions." Markets were stunned by this. Question marks are also being raised by the slowing consumption growth in China. In 2016, the Chinese oil demand grew at its slowest pace in at least three years, Reuters reported. It eased to 2.5 percent in 2016, down from 3.1 percent in 2015 and 3.8 percent in 2014. Besides, the slowing demand growth both in the US and China, the growing output in the US also continues to undermine the OPEC efforts. The EIA expects the US crude production to grow by 100,000 bpd to 8.98 million barrels this year, 0.3 percent less than the previous forecast. Yet, it could jump by 550,000 bpd in 2018, the EIA emphasized. Writing for Bloomberg Julian Lee, the former senior analyst with the Centre for Global Energy Studies, London of Sheikh Ahmed Zaki Yamani, underlines that rising output from those not included in the output cut accord and from the US are beginning to undermine the effectiveness of the OPEC deal, impacting the upward crude price trajectory adversely. Lee concedes that so far, the OPEC 10 have taken much bigger steps towards meeting their obligations than most thought possible, yet rising supply from those three OPEC members, outside of the agreement is offsetting the impact by reducing the size of the overall reduction in OPEC output to little more than 800,000 bpd. An even bigger threat to market rebalancing is coming from outside the group, Lee points out. US supply is rising rapidly and is already up by more than 400,000 bpd since October. Others too seem to be concurring. Daniel Yergin, the vice chairman of IHS Markit expects to see the "US production probably increase from beginning to end this year by more than 500,000 bpd," he told CNBC. As recently as last December, Yergin was of the view that US drillers could add 300,000 to 500,000 bpd. "A dollar invested in 2017 (in US drilling industry) produces about two and a half times as much oil as a dollar invested in 2014, so I think even at these lower prices we're going to see this recovery," Yergin underlined. As per Baker Hughes, US energy companies added rigs for a 13th week in the last 14, taking advantage of crude prices that have held mostly over $50 a barrel since OPEC agreed to cut supplies in November. Drillers added 17 oil rigs in the week to Feb. 3, bringing the total count up to 583, the most since October 2015. During the same week a year ago, there were 467 active oil rigs. Since crude prices first topped $50 a barrel in May after recovering from 13-year lows last February, drillers have added a total of 267 oil rigs in 32 of the past 36 weeks, the biggest recovery in rigs since a global oil glut crushed the market over two years ago, starting mid-2014. Baker Hughes oil rig count plunged from a record 1,609 in October 2014 to a six-year low of 316 in May 2016 as US crude collapsed from over $107 a barrel in June 2014 to near $26 in February 2016. Analysts at Simmons & Co and investment bank Piper Jaffray are now projecting the total oil and gas rig count to average 795 in 2017, 911 in 2018 and 1,022 in 2019. That compares with an average of 692 so far in 2017, 509 in 2016 and 978 in 2015, according to Baker Hughes data. Analysts at US financial services firm Cowen & Co said in a note that its capital expenditure tracking also showed 31 exploration and production (E&P) companies planned to increase spending by an average of 36 percent in 2017 over 2016. That spending increase in 2017 followed an estimated 45 per cent decline in 2016 and a 37 percent decline in 2015, Cowen said according to the 65 E&P companies it tracks. Investors are also descending onto Permian Basin in West Texas and in hordes. "We could easily see an extra 100 rigs out here in the Permian by June," Josh Clawson of Gesco, a Midland, Texas electrical contractor for oil drilling rigs was quoted in the press as saying. And though as yet, OPEC does not appear to be too concerned about the rising US output, yet the Iranian and the Qatari oil ministers were seen conceding last week that OPEC and other major crude-producing nations may need to extend output cuts into the second half of the year to re-balance the market. This was in somewhat contrast to Minister Khalid Al-Falih's assertion in Abu Dhabi on Jan.16, when he underlined that given the high level of compliance, an extension of the agreement probably wouldn't be necessary. Nonetheless, one has to point out that then too, he specified that "all players have indicated their willingness to extend (the output cut), if necessary." Ominous clouds are on the crude horizon and markets are beginning taking note of it!
