The Oil Supply Glut is Here to Stay in 2017

This does not bode well for price trends over the next 12 months.

By Irina Slav,

It has become painfully obvious that the much-hyped OPEC agreement to reduce global oil production by close to 2 million bpd won’t have the effect that its initiators had hoped for. True, crude has jumped above US$50 but failed to pass the US$55 barrier and move closer to US$60, which would have solved a lot of problems for some of the world’s biggest producers.

This price increase, however, has spurred optimism among some producers and motivated them to plan output ramp-ups, which will in turn dampen the upward potential of crude more effectively than growing doubts about top producers’ willingness to stick to their commitments under the historical agreement.

Let’s look at shale boomers, for instance: according to Tom Kloza, the global chief of energy analysis at the Oil Price Information Service, shale producers can add as much as half a million bpd to their output this year. They don’t even have to want to add so much – they may well have to, prompted by their lenders.

Then there is that doubt that the parties to the production cut agreement will be tempted to cheat and won’t be able or willing to resist the temptation. The three most likely cheaters seem to be Iraq, Iran, and Saudi Arabia. Iraq, because it is still locked in its fight with the Islamic State and needs all the petrodollars it can get its hands on. Iran, because it is in a rush to revive its energy industry and has made it clear repeatedly it has no intention to dance to any tune that Saudi Arabia plays.

Then there is Saudi Arabia itself, which spearheaded the latest attempt by OPEC to give prices a big push upwards. Saudi Arabia and Iran are regional archrivals. Now, with most sanctions lifted, Iran is eager to re-enter global oil markets, targeting some of Saudi Arabia’s biggest clients, such as China and India. It’s hard to believe, as Osama Rizvi noted in an article for Oilprice, that Riyadh will sit idly by, watching Tehran take a bite out of its market share.

Of course, markets also have to contend with the two exempted OPEC members, which are both doing their best to increase their output. Libya says it’s close to reaching a milestone of 900,000 bpd, on track to restore its production to pre-war levels. By the end of 2017, Libya plans to pump 1.1 million bpd.

Nigeria is also slowly but surely raising production even though it is still fighting with militants in the Niger Delta and the Boko Haram terrorist group. The country, however, has managed to raise its output to 1.6 million bpd and, according to President Buhari, should further improve it to 2.2 million bpd.

To further complicate matters, there is the duration of the cut agreement. As Tom Kloza notes in an interview for CNBC, it might well be over in six months, which is the term that the parties agreed. If someone cheats and/or if prices fail to reach the levels that most participants in the agreement are happy with, chances are that the cut won’t be prolonged into the second half of the year.

All of this means that supply is going to exceed demand for yet another year–the fourth in a row, in fact, as 2013 was the last year when demand was higher than supply. And this does not bode well for price trends over the next 12 months. By Irina Slav,

Pemex, Mexico’s state-owned oil giant that for decades has served as the government’s ATM, is now stewing in a toxic mix. Read… Shrinking Oil Giant Pemex Starts 2017 on Wrong Foot

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  31 comments for “The Oil Supply Glut is Here to Stay in 2017

  1. Chicken says:

    Speaking of Africa, it seems to me environmentalists should have a look at habitat loss.

    • d says:

      Those sort’s of “Environmentalist”only look at rich western culture based nation’s.

      • Chicken says:

        Perhaps their foundation donors (purveyors of debt) prefer selective environmental activism, out of sight out of mind.

        Get a rope.

    • Smingles says:

      Who are these amorphous “environmentalists”?

      What a silly statement.

    • Nick says:

      What makes you think that environmentalists are unaware of this issue? Or that all environmentalists should focus on this one single thing?

  2. R Davis says:

    “Saudi Arabia’s biggest clients”

    Piers Morgan: The Luxury Life of Dubai & A Luxury Tour of Dubai – youtube

    2:50 minutes into this promotional video .. Piers Morgan tell us that in only 10 years, Dubai will run out of oil. Please know that the Royals of Saudi Arabia signed off on this video so it must be correct.

    Crickey .. what are we supposed to believe.

    • walter map says:

      “Crickey .. what are we supposed to believe.”

      You’re supposed to believe whatever you’re told, even when it contradicts what you were told yesterday.

      Oil lubrication makes reality a very slippery thing.

    • Julian says:

      Dubai doesn’t have any oil anyway which is precisely why Dubai has diversified itself to not be reliant on oil as opposed to its neighbour Abu Dhabi.

    • robt says:

      The whole world was supposed to run out of oil in 1987. The experts took the published reserves of all the oil companies and divided by annual consumption. It came to 7 years.
      Just when the New Ice Age was going to hit hard … double whammy to make you worry.

  3. Chris says:

    On a somewhat different but related manner – do not expect the FED to raise interest rates in any real way as long as the glut continues. Low interest rated and debt roll over is critical to the survival of the US fracking industry.

    • walter map says:

      The taxpayer-paid subsidies only cover the executive bonuses.

    • Chicken says:

      If for instance someone with big pockets wants to collect a taxpayer funded government bailout loan to buy assets in default, concoct a story about how there’s gross excess of a key finite natural resource.

      Throw in several additional lies for good measure, make the story compelling enough to further convince the majority into making poor decisions.

      Rinse and repeat.

  4. Colin says:

    The US invades Libya again and their oil production may be seeing huge increases. Coincidence? If there’s some super-glut why are we constantly adding more?

    • walter map says:

      “If there’s some super-glut why are we constantly adding more?”

      Oil gets huge subsidies. Alternatives do not. It’s crony capitalism at its most expensive, not to mention profitable.

      Your capitulation is appreciated.

      • Chicken says:

        Funny, when it comes to claiming alternatives don’t receive subsidies, ethanol is completely ignored by misleading data cherry pickers.

        What doesn’t get subsidies are most wholesome food producers such as fruit growers for instance.

        What’s the real purpose of this constant misinformation campaign?

      • robt says:

        Driving up to any gas station and buying gas any time you want it is appreciated too.
        Price of gas, 1917: 22 cents/gal, (eq. maybe 6.60 today).
        Price of gas, 1953: 30 cents/gal, (eq. maybe 3.00 today).
        Price of gas, USA today: 2.20 to 3.00/gal. regional.

  5. Uncle Frank says:

    Optimism abounds in the Permian Basin with word spreading that Halliburton is on a hiring spree.
    As it turns out they plan on hiring 200 people.

    • walter map says:

      Halliburton is the poster child for American-style corporate welfare, even though it’s not actually a U.S. company.

      A you Yanks wonder why your country is broke. Sheesh.

  6. che says:

    very weak piece.
    US hikes production 500kbpd vs OPEC+NOPEC cutting 1.8mbpd+1mbpd demand growth => glut is here to stay?

  7. RD Blakeslee says:

    “It’s hard to believe … that Riyadh will sit idly by, watching Tehran take a bite out of its market share.” – from the article

    Bloomberg reported this morning that the Saudis are shutting down their intermediate and heavy crude wells and shipping only light crude (most refiners prefer light crude), to maintain market share.

  8. fozzy says:

    “True, crude has jumped above US$50 but failed to pass the US$55 barrier and move closer to US$60, which would have solved a lot of problems for some of the world’s biggest producers.”

    Brent is currently trading at $56. It’s hard to take any write up about oil prices seriously if it doesn’t even distinguish between WTI and Brent.

  9. Paulo says:

    Shale investments = Junk Bond status…investors duped into chasing yield in an almost ZIRP environment.

    Shale producers have yet to make a cent of profit on the product they produce. It is all hype.

    (sources will be provided in my post)

    The energy story is a reflection of FED meddling and distortions in the Market. It isn’t just about energy.

    This is just one article and decent Web source:

    As JH Kunstler often says, oil prices below $70.00 bbl kills oil companies, and oil prices above $70.00 kills the economy. The price range in historical energy cycles as cited in this article are now in a very limited range of profit and affordability. It is called the undulating plateau of Peak Oil. Historical oil returns were at a ratio of + 100:1, that is to say for every barrel of oil used in production, refining, and delivery of petroleum netted a return of 100 barrels.
    Tar Sands are now at 3:1.
    Shale is 5:1
    Corn ethanol is 1.4:1.

    Just a point, most conventional oil wells are ‘shut in’ when production lossses due to water cut reaches a return of 5.6:1.

  10. Greatful again says:

    The word “glut” gets very misused in these articles. Kinda like its being used as a click-bait for financial analysts.

  11. Chicken says:

    Who do you believe America, Wikileaks or US Intel officials?
    Result: 72% to 28% in favor of Wikileaks

    • d says:

      Which explains the last two and the coming third disastrous POTUS.

      Idiot electorates, elect the idiots they deserve, to rule them.

  12. nick kelly says:

    The idea of Russia or Venezuela, parties to the production cut, not cheating is complete fantasy. Both are near bankrupt, especially the latter where an SUV can be filled for the price of a candy bar and tankers truck gas to neighboring countries, maybe paying a bribe at border.

  13. The customers are broke.

    There is no return on fuel use, customers must rely on access to credit. QE provides funds to drillers and speculators while starving customers. Preference around the world for dollars and the associated depreciation of local currencies. Wars, disturbances, disasters, political upheavals that together make fuel more expensive along with the end of subsidies in driller countries like Mexico.

    The customers go broke there is less of a market for fuel, every single day the market shrinks.

    Market shrinkage => less credit for drillers => driller insolvency => fuel shortages => less ‘output’ or GDP => market shrinkage in a self-amplifying circle.

  14. SoberMoney says:

    The dirty energy ideologues posting here are in denial. Any fossil fuel company seriously looking out for their shareholders is actively diversifying their energy production to include renewables.

    Renewables are the future. Only a fool or an Exxon supplicant can’t see it.

    For my investment money, the company to bet on is Statoil (symbol STO).

Comments are closed.