Market perception of a dramatic surge in US crude oil output has been one of the key drivers of the bearishness that has enveloped oil markets over the past four months, according to analysts at Standard Chartered.
Key Quotes
“In our view most oil traders have moved from their previous pragmatic question of how much US supply at what price, to an unquestioned assumption that supply will grow fast enough to cause market imbalance even at low prices. A run of 23 increases in oil-rig counts and strong weekly estimates helped support an assumption that supply growth was accelerating and could soon offset OPEC cuts. For example, weekly estimates from the Energy Information Administration (EIA) showed a rapid increase in crude output of 250 thousand barrels per day (kb/d) from February to April.”
“Over the past week, three data releases have raised questions on the sustainability of US output growth at current prices. The oil rig count fell for the first time since midJanuary, and weekly estimates showed a 100kb/d fall in output, mainly due to temporary storm effects. However, we think the third piece of data is the most important. The EIA revised April US output lower by 184kb/d. Revised monthly data show an increase of just 8kb/d from February to April, not the 250kb/d in the weekly data that the market reacted to.”
“Some of the April weakness is likely temporary as US offshore output fell due to maintenance. However, even allowing for that effect, in our view there is still a significant shortfall in onshore output relative to prior market expectations. We think the fall in prices has caused US output growth to slow, and that revisions for May and June will confirm that supply is growing at a significantly more modest rate than the market has believed up to now.”
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