Oil market indicate bleak prospects for fresh OPEC supply cap deal

There are genuine concerns that OPEC’s supply cap deal which is due for review in June this year, may not elicit the same enthusiasm as it did last year, as shale producers’ broach markets under-supplied.

According to data from US department of energy, the country’s oil inventories last month rose by 8.21 million barrels to 528.4 million barrels, the highest since records of oil inventories started to be kept 35 years ago. This is due to the activities of shale producers who are pumping oil as if it were going out of fashion.

Last week, Baker Hughes rig count data shows the US domestic oil and gas rig count up by 21 rigs bringing the total to 789 active oil and gas rigs which is a 313-rig increase over last year.

Last year, OPEC and some non-OPEC producers agreed to cut 1.8million barrels per day of supply, a ploy to re-balance an oil market that seemed sated with oil. If they factored the shale oil producers as a threat, they probably had modest expectations of their irritant value.

“What OPEC has shown is that it clearly cannot stomach $40 to $50 oil, whereas the US producers over the past two years have gotten more and more efficient,” Kate Richard, CEO of energy investment firm Warwick Energy told CNBC Africa.

Richard added, “We have (shale producers) retooled our cost structure. We have become cheaper. We have become more efficient, and we can now make really good money in the core plays in the US at $40 to $50 oil.”

The biggest threat OPEC faces, is that shale producers are now drifting into some Asian markets OPEC once thought it had exclusive preserve forcing members like Saudi Arabia to begin to second guess the deal.

Responding to questions about sustaining the deal, Khalid al-Falih, Saudi Arabia’s oil minister did not sound too confident.

“We will sustain it if stockpiles are still above the five-year average, if the markets are still not confident in the outlook, if we don’t see companies and investors feel good about the health of the global oil industry,” he said.

OPEC will meet on May 25 to decide whether to continue its production cuts, aimed at ending a slump that battered the economies of energy exporters around the world.

While the deal has recorded success, yet it has not been total compliance as non-OPEC producers have fallen short of cutting 558,000 barrels a day, a level they agreed to in December. Russia, the largest contributor, delivered about a third of its cuts in the first two months of the deal.

The cartel produced a combined 31.96 million barrels a day last month, compared with 32.1 million barrels a day in January, according to its latest oil market report.

Figures for this month are set to be higher as Nigeria and Libya ramp up production and Iran and Iraq also record improved production figures.

Saudi Arabia who has been doing the heavy lifting by providing the lion’s share of the 1.2 million barrels a day the OPEC members’ cuts, raised production above 10 million barrels a day in February.

As OPEC members and non-members meet on March 26 in Kuwait in a ministerial meeting to review compliance with the output agreement and discuss whether they would extend the cuts beyond June, shale producers will be watching with bated breath to see what becomes of the deal.

ISAAC ANYAOGU