Falling Inventories Fails to Motivate Crude Momentum

Market Trends - 15/03/2017

Corroborating data released on Tuesday by the American Petroleum Institute, the US Department of Energy reported a 237,000 barrel decline in US crude oil stockpiles through the end of last week, marking the first decrease in inventories in 9-weeks.  However, even though the headline data was optimistic for crude oil prices, futures are on the retreat from intraday highs following the considerable climb in domestic US production.

A deeper dive into the data showed that crude output ascended to a new cycle high of 9.109 million barrels per day last week, mirroring the ongoing trend higher in the operation drill rig count.  If anything, it goes to show that the efforts by certain global producers to kill off the swing producer status of the US shale patch has been nothing short of an unmitigated failure.  Quite the contrary, the move to limit the Cartel’s production levels has given shale drillers a much-needed lifeline.

Adding to the overriding pessimism that is drowning out the stockpile decline is the recently published Drilling Productivity Report compiled by the Energy Information Administration.  Per the analysis, the US shale patch is forecast to add an additional 109,000 barrels per day during the month of April.  This precipitous climb in US production is accompanied by surprising gains in OPEC production along with the increased likelihood that ongoing output cuts will not be extended past the initial six months agreed upon.

Should OPEC fail to formulate a new plan to fight the climb in global oil stockpiles, they may very well find themselves under pressure to dissolve the deal in an effort to preserve market share being lost to resurgent American production.  Now that shale has been more competitive than ever thanks to falling breakeven costs, competition on crude prices may once again rear its ugly head, driving futures prices to levels last seen approximately a year ago.

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