On Tuesday, price of Brent fell further below 100 USD per barrel (USD/bbl) level despite the fact that the global sentiment slightly improved. Meanwhile, the spread between Brent and WTI hit the lowest level in more than a month after the release of API’s (American Petroleum Institute) figures on US crude inventories in Cushing which showed a modest decline. Generally, market conditions have eased significantly in recent weeks. The market saw both shrinking prices of oil and easing backwardation which suggest more comfortable supply-demand balance. Market indicators have been supported by the reports of all three major oil agencies – OPEC, EIA (Energy Information Agency) and IEA (International Energy Agency). According to the fresh IEA Oil Market Report, OECD oil stocks increased by 17.3 million barrels (mbbl) in April. The first estimates for May suggest even higher built of 20 mbbl (IEA) or 31 mbbl (EIA).
Regarding the regional structure, EIA’s data confirmed that oil production has been rising in both OPEC and non-OPEC countries (see the chart). Among non-OPEC countries, the most noticeable has been a sharp increase in US production (for example North Dakota shale oilfields) which totals 2 million barrels per day (mbpd) over past 60 months. Apart from that, FSU oil production is significantly above its long-term average (esp. Russia). As concerns the OPEC production, the latest data unveiled a significant decrease in Iranian oil production/exports as western sanctions bite in. However, the drop is more than offset by increased production of Saudi Arabia, Kuwait, UAE and Iraq.
As far as tomorrow’s OPEC meeting is concerned, we do not expect significant changes in the cartel’s policy. Clearly, some members do not like decreasing oil prices (Iran is being hit particularly hard as both price and its exports are shrinking) but we do not expect they have enough power to enforce a reduction in production quotas. Above all, Saudi’s oil minister Naimi told Reuters yesterday he was happy with the way the current state. Therefore, we believe that the OPEC will listen to IEA’s calls for keeping the oil production at current levels and Saudis to maintain its role of swing producer.
Gold posted some gains on Tuesday despite the fact that the situation in the euro zone further worsened (measured in terms of Spanish and Italian yields). The price of the yellow metal is thus hovering at 50 days moving average (1613 USD/toz).
We think that current strength of gold price results from the fact that market bets on a further round of monetary easing from major central banks which seems to be more and more likely scenario (especially in light of recent situation in the euro zone).
Chart of the day:
Liquid fuels production in May 2012, deviations from average measured in standard deviations. (Source: EIA, CSOB)