During the last weeks, what we discussed in previous articles became a reality. And so it is, that the Organization of Petroleum Exporting Countries has lost its grip on the global crude oil markets and its actions are not as effective as they once were.

A new significant fall in prices few months after the extension of output cuts took place in November 2016 makes it clear  the more limited influence OPEC can apply on price levels and its decreasing effectivity when it comes to re-balancing the market ( even counting on other non-OPEC countries such as Russia).

Brent crude futures prices evolution 2016-2017. Chart by @JKempEnergy

As rightly shown in the chart above by Reuters senior analyst John Kemp, last week crude oil prices came back to levels prior to the agreement on November the 30th 2016, and accrues a 20% drop year to date. Even though the immediate reaction after the agreement was  a clear a bullish trend up to the 57$/b, price deflated the last weeks , now far from the 50$/b and aiming to the range of 45-40 $/b as a resistance.

Traders and analysts are moving away their focus from OPEC moves and updates, and are turning it towards other factors to make decisions and take new positions. We will see some of them below.


The rest of crude producing countries not belonging to the OPEC (and led by the US) are becoming more and more relevant and have a greater impact in price and global stocks levels. Such countries do not see their production curve capped in any way and take advantage of every opportunity the market offers, adding more barrels to the global supply.

Nowadays, countries like Brazil, Canada, Libya or Nigeria release an important fraction of crude volumes to the markets. The last two (which are excluded from OPEC’s agreement) recovered in great measure their normal production levels, Libya hoping to reach 1.1 mbpd in August and Nigeria trying to push over the 300K bpd next month.

On the other hand, shale oil firms keep producing non-stop. Even though the addition of platforms has slowed down recently, they recently hit 22 weeks straight with positive variations and now hold twice as much platforms as the existent ones last year by this time. In its June reports, the Energy Information Administration reported a production increase of 12,000 bpd, reaching the 9.330.000 bpd this very month. Since July 2016, there’s been a production increase of 11.2%.

According to estimations from the OPEC itself, following this pace, they forecast levels of production of +800,000 bpd in 2017. This, coming from the same organization that in December 2016 ensured a fall in production of -150,000 bpd this year.

Nobody is interested in excessively low crude oil prices, not even shale oil producers. Although the break-even point may vary depending on the field of extraction or type of installation, majority of shale firms find theirs at around 38-45 $/b according to Rystad Energy. And even if the obtained margin is low, they would still be willing to produce more in order to gain market share as long as this does not translate to significant losses.

Nevertheless, American producers should keep an eye on the evolution of global stocks or else, the excess of production could turn against them in the future.


The real issue appears when the trajectory of global output overtakes the pace of the demand. According to data from the EIA, global demand for this commodity will reach 97.3 mbpd in the second quarter (500.000 bpd over global production) and forecasts an increase of 1.5% for the next year. That being said, demand growth percentage is less and less distant from that of the OPEC production curve. To this we must add the increasing oil glut in off-shore tankers, that we will see below.

Chinese demand, one of the main oil importers, is growing at a 3%, when it once stood at an impressive 8-9% (even though their imports reached 9 m/barrels in May). The Asian continent (specially India, whose imports fell by a 4% last month) is seeing its growth diminished, and hence it is notably affecting the overall demand.

In the United States, gasoline demand registered a drop by -5% in June compared to the same period in 2016.


This month of June, crude oil volumes of stocks in tankers overseas hit a new record:

Crude oil storage in tankers evolution- Bloomberg

Even though for the second quarter stocks seemed to be gradually decreasing, last weeks increases left all the achieved undone, hitting a yearly record of 111,9 milions of barrels. With the current contango situation we are in, it may turn out to be profitable to store crude oil and sell it afterwards in the long run.

The majority of increases came from the North Sea (up by 32% in 2017) and Singapur (up by a 23%) according to Kpler (www.kpler.com).

For the United States, since last April, crude oil stored in tankers diminished by a 4.5% to 512 million/b. Nonetheless, gasoline stocks rose for the last two consecutive weeks in June. Also this month, more than 52 million barrels were loaded up in tankers, something that did not happen since 2012.

OPEC’s target is to get the stocks to the last 5-years-average level by 2018, now opened to question as they can hardly meet their own agreement’s compliance levels.


Nowadays the crude oil market is one of the most liquid markets on the planet. In fact, the greatest part of transactions in it are purely speculative, and billions of dollars are spilt from hedge funds aiming to obtain a profit using the fluctuation of the market.

This is clearly reflected in the price behavior, that is responding stronger to the positions traders take rather than to the real fundamentals surrounding crude oil. When a fundamental event takes place, such as a rise in American stocks, funds take new short positions maximizing the effect of that event in price level.

For the last 3 weeks, hedge funds accumulate a withdrawal of -160 million barrels in long positions. In the crude market of options of the US, a significant part of derivatives with maturity in December have sell orders at 45$/b.

Traders have lost confidence and do not rely on the OPEC capability to change the odds anymore. In addition to the drivers we just discussed, there is also the uncertainty of whether the organization will be able to comply and sustain the output cuts, or even increase them if necessary. If their efforts failed to bring the price up, there is a chance a new war for market share could start worldwide, which would in turn unleash more and more production. This scenario would lead the market way under the 40$/b.

Stating that the OPEC is in a state of decay is a fact, and it must play a new role in a market that evolves at a fast pace and whose rules are not the same they were 10 years ago.


Javier Palazón | Energy Consultant

If you found it interesting, please share it!

Recent Articles