JEDDAH — International oil prices rallied in April by more than 20 percent as data out of the US pointed to a slowdown in US crude oil production growth, NBK said. “By the end of the April, Dated Brent, the international benchmark, closed at $64.9/bbl, a gain of almost $11/bbl or 20 percent on the month. Similarly, West Texas Intermediate (WTI), the US crude marker, increased by 25 percent in April to close at $59.6/bbl. Meanwhile, Kuwait Export crude (KEC) closed the month at around $60/bbl. April's prices were the highest so far this year. “A combination of factors helped boost oil prices. Chief among those were preliminary indications that the relentless rise in US crude production was beginning to finally slow: the weekly buildup in US commercial crude inventories in the week-ending 24 April had slowed to 0.4 percent, or 1.9 million barrels—a significant drop compared to the 1.1 percent increase of 5.3 million barrels of a week earlier. And, the number of active US oil rigs continued to fall, declining by almost 58 percent by 1 May. The prevailing environment of low oil prices has forced many US energy companies to scale back their spending plans on new oil and gas well development. “Moreover, April's rally was also helped by geopolitical concerns stemming from the Saudi-led intervention in Yemen, which markets factored could have threatened crude oil supplies travelling through the Bab El-Mandeb Strait, one of the most important shipping corridors in the world. The recent weakness in the US dollar was also a factor helping to prop up prices. “Earlier in April, hedge funds and speculators were seen placing large bets on a sustained rally in oil prices, accumulating record numbers of futures contracts. Many traders were of the opinion that oil prices had bottomed. Brent crude futures for delivery in December 2015 through to December 2017 were ranging between $69-73/bbl at the end of April. “Citing the effect of colder temperatures in the first quarter of the year and the slowly improving global economic backdrop, the International Energy Agency (IEA) expects world oil demand growth to come in at 1.1 mb/d in 2015, an increase of 90,000 b/d over its previous forecast, in March. This would bring average total world demand this year to 93.6 mb/d. Since 2Q14, when global oil demand growth dropped to a five year low of 270,000 b/d year-on-year, demand has steadily risen every quarter to reach a peak of 1.1 mb/d in 1Q15. “OPEC supply surged by a sizeable 1.2 mb/d in March to a 13-month high of 31.5 mb/d according to OPEC data. This was led primarily by Saudi Arabia whose production increase of 650,000 b/d (to 10.3 mb/d) was the kingdom's largest monthly gain since November 2011 and Iraq, which took advantage of better weather conditions in the south to boost output by 556,000 b/d to 3.3 mb/d. Libya also enjoyed a rebound in production after four consecutive months of declines, increasing by 184,000 b/d to 520,000 b/d. Kuwait, meanwhile, held steady at 2.85 mb/d for the third month in a row. “Saudi Arabia's production increase comes in response to better than expected demand from its Asian customers and ahead of the summer season when energy demand tends to peak. Domestic refinery runs are also expected to have increased with the ramping up of the 400,000 b/d Yasref refinery in March. Saudi's output gains have also come in spite of the prevailing softness in oil prices, with the kingdom seemingly steadfast in sticking to its strategy of preserving market share and shifting the onus of any production cuts to non-OPEC producers. The kingdom's Oil Minister Ali Al-Naimi expects production to continue at around 10 mb/d and oil prices to “improve in the near future”. Indeed, in early April, Saudi Arabia raised the price it sells its crude to its Asian customers for the second month in a row. “OPEC's output in March was above the group's official ceiling of 30 mb/d for the eleventh consecutive month according to the IEA. And a key question arises over OPEC's management of Iran's potential return to the oil markets, in light of Iran's signing of the preliminary nuclear agreement with the P5+1 (the US, UK, France, China, Russia plus Germany) on 2 April. Iran is currently producing around 3.0 mb/d and could theoretically push that to 3.6 mb/d within months of the lifting of the embargo on the country's oil exports, according to the IEA. Expanding production capacity beyond that to 4.0 mb/d and higher will likely require considerable investment and development in the country's oil fields and infrastructure. The participation of international oil companies with their technological expertise is thought to be crucial. “Moreover, pending a more conclusive and detailed agreement in June, there is little idea of when and at what pace sanctions will be lifted. The prospect of additional volumes of Iranian crude hitting already oversupplied markets is bound to pressure international oil prices downwards. So OPEC's response will be crucial. Iran's oil minister, Bijan Zanganeh, has already called for the group to cut output by 5 percent in order to accommodate extra Iranian crude. In view of the cartel's current focus on preserving market share, however, it is not certain that OPEC members and especially Saudi Arabia would be amenable. It is also not beyond the realm of possibility that OPEC could opt to accept extra Iranian crude or even raise the official production ceiling above the current level as it did in December 2011 when it took on returning Libyan and Iraqi crude supplies. “Non-OPEC production, meanwhile, continued to increase in March. Output rose by 100,000 b/d to 57.7 mb/d, according to the IEA. This brought the 1Q15 average to 57.5 mb/d, a year-on-year increase of 1.7 mb/d. Once again, the US was the primary driver, with production gaining 1.1 mb/d y/y (or 13.2 percent) to 9.32 mb/d in March, according to the US Energy Information Administration (EIA). Approximately 60 percent of this is crude from shale/tight oil formations. The IEA's outlook for US crude oil production growth, while still overwhelmingly positive at 550,000 b/d, has moderated somewhat in view of the decline in rig counts and reductions in capital expenditure announced by US energy companies in the last few months. “Slowing non-OPEC output growth, coupled with rising demand in 2015 have consequently raised the ‘call on OPEC crude and stock change' during the second half of 2015 to 30.35 mb/d. This is above the group's official production ceiling. For 2015 as a whole, however, the ‘call' remains at 29.5 mb/d.” — SG
