Oil rises for 2nd day amid hopes for output cut by US producers

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Reuters
KEY POINTS
  • Brent crude futures rose $1.44, or 3.9%, to $38.66 a barrel by 0226 GMT, while U.S. West Texas Intermediate (WTI) crude gained $1.12, or 3.3%, to $35.48 a barrel, following a jump of over 8% the previous day.
GP: Oil field 200227 Asia
A derek pumps in an oil field in Kuwait near the Saudi Arabian border.
Joe Raedle | Getty Images

Oil prices climbed for a second day on Wednesday, lifted by hopes that U.S. producers will cut output, but gains were limited compared with Monday’s crash after Saudi Arabia and Russia triggered a price war.

Brent crude futures rose $1.44, or 3.9%, to $38.66 a barrel by 0226 GMT, while U.S. West Texas Intermediate (WTI) crude gained $1.12, or 3.3%, to $35.48 a barrel, following a jump of over 8% the previous day.

“Expectations that U.S. shale oil producers will need to trim output helped improve the market sentiment,” said Satoru Yoshida, a commodity analyst with Rakuten Securities.

Occidental Petroleum on Tuesday joined a growing list of hard-pressed North American oil producers slashing spending and drilling after crude prices slumped to their lowest levels in more than three years.

Oil and equity markets had staged solid rebounds on Tuesday after the previous day’s pummeling, supported by signs of co-ordinated action by the world’s biggest economies to cushion the economic impact of the coronavirus epidemic.

But growing skepticism about Washington’s stimulus package to fight the coronavirus outbreak knocked the steam out of an earlier rally in Asian shares on Wednesday.

“The rebound in crude oil is not expected to last long, with Saudi and Russia boasting about how much they can boost output by as the battle for market share begins,” ANZ said in a note.

Saudi Arabia said on Tuesday it would boost its oil supplies to a record high in April, raising the stakes in a standoff with Russia and effectively rebuffing a suggestion from Moscow for new talks on production levels.

The clash of the two oil titans sparked a 25% slump in crude prices on Monday.

Russian oil minister Alexander Novak said on Tuesday he did not rule out joint measures with OPEC to stabilize the market, adding that the next OPEC+ meeting was planned for May-June. But Saudi Arabia’s energy minister told Reuters he did not see a need for the meeting if there was no agreement on measures to deal with the impact of the coronavirus on oil demand and prices.

“If the slumping oil prices force U.S. shale oil producers to cut production by June, there is chance that OPEC+ would go back to an agreement to reduce output,” Rakuten’s Yoshida said.

On the downside, U.S. crude oil inventories rose in the most recent week, while gasoline and distillate stocks dropped, data from industry group the American Petroleum Institute showed on Tuesday.

Here are the world’s top 10 oil producers

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OPEC and Russian officials have called on some of the world’s leading oil producers, both inside and outside the cartel, to form a consensus and back a supply curb until the end of 2018.

OPEC is widely expected to defer an announcement regarding an extension to cuts at its next policy meeting in November. However, oil has sustained a rise above $60 a barrel in recent days as expectations of an extension to OPEC-led cuts beyond March supported prices.

CNBC takes a look at the world’s 10 leading oil producers being urged to back an ongoing effort to clear a global supply overhang.

— CNBC’s Tom DiChristopher contributed to this report.

1. Russia

Russia overtook Saudi Arabia as the world’s largest crude producer in December 2016. The non-OPEC producer pumped 10.34 m/bd in August, a modest decline from the month previous.

OPEC has been partnering with other major oil exporters, most notably Russia, to keep about 1.8 million barrels per day of supply off the market through March. The goal is to shrink global crude stockpiles and drain a glut that has weighed on prices for the last three years.

2. Saudi Arabia

OPEC kingpin Saudi Arabia pumped 9.95 m/bd in August, slipping below 10 m/bd for the first time since May.

The cartel’s biggest producer has provided the lion’s share of cuts since OPEC implemented the caps in January.

3. US

The U.S. produced 9.34 m/bd in August, its third consecutive monthly increase, according to data published by JODI.

OPEC General Secretary Mohammed Barkindo called on U.S. shale oil producers to help support plans to curb global oil supply in early October, warning that unprecedented measures may soon be necessary in order to rebalance the oil market.

North American shale drillers have helped production soar by nearly 10 percent in the U.S. this year, according to Reuters, despite OPEC and some other producers — including Russia — cutting supplies in a bid to prop up prices.

4. Iraq

Iraq, OPEC’s second-largest producer, pumped 4.38 m/bd in August, down from 4.4 m/bd in July.

Baghdad has yet to drive down output to levels it agreed to last winter.

5. Canada

Canada pumped 3.12 m/bd in August, according to data published by JODI, down slightly from the month previous.

6. Venezuela

Venezuela produced 2.1 m/bd in August, fractionally lower than the amount produced the previous month.

At the start of October, Venezuela’s Oil Minister Eulogio del Pino said the OPEC and non-OPEC coalition would try to recruit up to 16 more oil-producing countries to try and bolster rebalancing efforts.

The current deal, which runs through March, sees OPEC and 10 other non-OPEC countries pledge to keep 1.8 m/bd off the market.

7. Nigeria

Nigeria pumped around 1.99 m/bd in August, according to a JODI estimate.

Africa’s biggest producer has said it would consider production limits once its output stabilizes above that level. OPEC gave Nigeria and Libya a waiver because internal conflicts caused big production declines in both countries last year.

8. Mexico

Mexico produced 1.94 m/bd in August, the third straight month the country had decreased oil supply.

Ahead of OPEC’s plan to extend a production cut through to the end of 2018, Mexico’s deputy energy minister reportedly said the country had not yet been consulted by the cartel.

Several non-OPEC producers, including Mexico, supported the organization in order to try and drain a global inventory glut last year.

9. Angola

Angola, OPEC member and Africa’s second largest oil producer, pumped 1.68 m/bd in August. It was the third consecutive month the country had increased oil production.

10. Norway

Norway pumped 1.57 million barrels per day (m/bd) in August, down from 1.62 m/bd in July, according to the latest data published on the website of the Joint Organizations Data Initiative (JODI).

OPEC who? US oil producers are moving into the Asian market

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  • In a shakeup to the established order, U.S. crude oil exporters are moving more cargoes toward Asia
  • Exports from U.S. “tight oil” extracted from shale formations alone may swell to over 3 million barrels a day by 2022 — with a third of that volume absorbed by Asia, said one economist

Workers aboard a Shell platform in 2013 as it sails away for the Mars B Field in the Gulf of Mexico.

Eddie Seal | Bloomberg | Getty Images
Workers aboard a Shell platform in 2013 as it sails away for the Mars B Field in the Gulf of Mexico.

Mars and Poseidon are coming to Asia.

That is, those two varieties of U.S.-produced crude oil are spearheading American exporters’ direct challenge to OPEC for market share in Asia.

In a shakeup to the established order, U.S. crude oil exporters are moving more cargoes toward high-growth Asia as they capitalize on favorable price differentials and as supply curbs by the Organization of Petroleum Exporting Countries force Gulf producers to withdraw from their traditional demand heartland.

That’s good news for Asian buyers who benefit from a more diversified basket of crude oil on offer and as competition between suppliers drives down prices.

“See it as a bigger buffet table for Asian refiners who have more supply options and sellers to engage with,” said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years.

India received its first American oil cargo of 1.6 million barrels on Oct. 2, the result of Prime Minister Narendra Modi’s visit to the U.S. in June where he negotiated contracts to supply three Indian refineries with nearly 8 million barrels.

‘Markets 101’

All of this change was kicked off when the Obama administration lifted a 40-year-old ban on exporting domestic oil in December 2015.

Now, more U.S. crude is on the way if market economics stay favorable.

One of the decisive factors dictating global oil flows is the price gap between two international benchmarks: Brent crude oil and U.S. counterpart West Texas Intermediate. Typically, the higher Brent’s premium is over WTI, the stronger the pull for lower-priced U.S. crude from outside buyers.

The gap between Brent and WTI hit its widest level in two years in early October at over $6.00 a barrel. That spread “is the one everyone hones in,” said Driscoll, though other differentials are also closely monitored by oil traders for clues generating possible arbitrage leads, as is the gap between U.S. Mars crude oil – increasingly seen as a key export grade – and WTI.

And exporting is an increasingly popular option: U.S. crude exports rose to a record 1.98 million barrels a day in the week ending September 29.

That’s “classic Oil Markets 101,” said Michael Wittner, head of oil research at Societe Generale, “too much crude in the U.S. and too little crude elsewhere means that U.S. prices weaken relative to global prices, and exports increase to address the imbalance.”

OPEC on notice

Exports from U.S. “tight oil” extracted from shale formations alone may swell to over 3 million barrels a day by 2022 — with a third of that volume absorbed by Asia — said Ed Rawle, chief economist at Wood Mackenzie.

That signals a change in the energy world order as OPEC influence wanes. Some energy commentators believe the fracking boom has helped the U.S. take the title of the world’s “swing” producer from Saudi Arabia. The Americans, it’s thought, now possess the capacity to respond to fluctuations in market demand.

As tankers laden with U.S. crude move eastwards, OPEC is sure to take notice.

“Traditional OPEC suppliers will need to watch this space and price their crude competitively as up to 50 percent of incremental crudes into Asia could come from non-OPEC,” Rawle said.

Whether more U.S. crude gets shipped east will hinge on how fast capacity can be added to key U.S. export terminals such as the Louisiana Offshore Oil Port, America’s only deep-water tanker port in the Gulf of Mexico.

“The emergence of the U.S. as a significant exporter to Europe or Asia will only be progressive and contingent on the development of Gulf Coast export capacity and crude price differentials remaining favorable,” said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas. “For now, these exports remain opportunistic.”