Oil Prices Drop Following Record US Crude Stocks

Brent daily chart

Brent daily chart

Oil prices dropped more than 2% Thursday (http://www.marketwatch.com/story/oil-prices-under-pressure-after-historical-high-for-us-crude-stocks-2017-03-02), dragged down by the latest expansion in USA stockpiles and production (http://www.marketwatch.com/story/oil-seesaws-as-crude-supplies-rise-an-8th-week-but-by-less-than-the-market-expected-2017-03-01), which exacerbated concerns that the market is still oversupplied despite OPEC output cuts. April WTI was changing hands around $53.76, up 11 cents.

The Organization of the Petroleum Exporting Countries (OPEC) is reportedly only 70 percent of the way in its oil production cutbacks towards reaching the level it thinks will eliminate the global glut and boost prices, and presumably narrowing this gap will be even more hard to achieve with news Thursday that Iran is pumping in excess of its goal and production from normally compliant-friendly Angola failed to meet its reduction target last month.

Saudi Arabia and Angola was reported to have cut production by half helping offset weaker compliance by other members that agreed to limit their output.

US crude imports averaged 7.6 MMBPD, up 303,000 BPD from the previous week's average.

On the other hand, analysts have been closely watching the production growth from OPEC players that were not included in the production cuts deal, including Libya and Nigeria.

"There is a very stale smell hanging over the market", Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, told Reuters Global Oil Forum. Distillate fuel inventories decreased by 0.9 million barrels, also a fraction of the 4.9 million barrel contraction seen a week earlier, and propane/propylene inventories fell by 0.5 million barrels, a lesser drop than the 3.3 million barrels fall seen a week earlier.

"Full compliance with production cuts are not showing up in lower exports for numerous OPEC countries", he said.

United States crude stocks sat in early February just 3.5 million barrels below the all-time high of 512.1 million barrels seen in April 2016, according to Energy Information Administration data.

Despite the bearish factors, the coming conclusion of seasonal maintenance period in the US could provide some near term support, analysts say.

"If January 2017 was considered a fairly "boring" month for crude oil prices, February was even worse!" the Singapore Exchange said in a note, pointing out that Brent prices traded in one of the narrowest ranges in recent memory last month -between $54 to just over $57 a barrel.

As for the demand outlook, it remains relatively strong, with oil consumption forecast to grow between 1.2-1.62 million b/d in 2017 and, according to the EIA, by 1.46 million b/d in 2018.

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