Morning Market Overview

If anyone believes the OPEC production cutting accord is not working think about a few of the 2017 highlights. Spot WTI and Brent prices ended 2017 at the highest level since June of 2015 when the market was just beginning to stabilize after the huge shale production related price decline. The spot WTI contract ended the year $34.37/bbl or 132% above the low hit in February 2016. Inventories are in a destocking pattern. Total US combined stocks of crude oil and refined products are now 135.8 million barrels below the high hit in February of 2017.

On a more global basis an important metric (according to the EIA) for identifying oil market balance is the level of commercial liquids inventories compared with their five-year average for countries in the Organization for Economic Cooperation and Development (OECD). Since reaching a record high of almost 3.09 billion barrels at the end of July 2016, total OECD liquid fuels inventories have fallen by 137 million barrels to 2.95 billion barrels at the end of November 2017.

Over the same period, the surplus to the five-year average has declined by 210 million barrels, ending November at an estimated 174 million barrels. OPEC and the non-OPEC participating countries to the production accord have been operating at a historically high level of compliance to the accord and have agreed to extend the cuts through 2018. All the above has occurred while US crude oil production remained in a strong uptrend ending 2017 with total crude oil production at the highest level of the year and 144,000 bpd above the high hit in June of 2015 and 11% above the year end level in 2016. The global economy is growing, and global oil consumption is also growing.

The above are just a few of the main highlights of the evolution of the global oil market and what impact the changing environment has had and likely to continue to have on the global pricing relationships for oil. OPEC has clearly demonstrated that they are still capable of operating in a price supporting mode as they have many times in the past.

There are still a lot of variables and unknowns that could impact or even derail the success that has come about from the OPEC accord. For now, the medium-term trend is still suggesting higher prices heading into 2018.