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 The 70 percent oil price slide between 2014 and early 2016 has been
pegged to one problem: production exceeding demand by as much as 2
million barrels per day (bpd).
But oversupply is evaporating quickly due to output cuts in the
Americas - including the United States, Canada and Latin America -
and also increasingly in Asia.
"Unplanned oil supply disruptions have been a key element so far
this year that have contributed to a tighter oil market than was
otherwise expected," said analyst Guy Baber of Simmons & Co.
If the disruptions last, there will be limited spare capacity to
meet demand, Baber cautioned.
Output from the Americas dropped over 1.5 million bpd last quarter,
while producers in Asia and Australia cut some 250,000 bpd, eating
away large chunks of the world's oversupply, government, industry
and consultancy data shows.
This comes at a time when members of the Organization of the
Petroleum Exporting Countries (OPEC), led by Saudi Arabia, have
refused to curb output in order to retain market share and squeeze
out higher-cost competitors.
"The Saudis have achieved what they want in that the market is
re-balancing through price," said senior oil analyst Neil Beveridge
of Sanford C. Bernstein.
"Over the past 12 months Saudi has raised production, putting
downward pressure on price to bring back discipline among the
producers. This is now playing out."
In fact, with so much non-OPEC output now off the market, producers
like Saudi Arabia and Qatar have been able to raise supplies and
prices for shipments to Asia, the world's top oil consuming region.
Outages in Canada are also helping speed up the re-balancing,
Beveridge added.
CUTS GALORE
A raging wildfire in Fort McMurray, at the heart of Canada's oil
sands region, has forced more than 690,000 bpd out of production,
according to Reuters estimates, with more disruptions possible.
"In the last two years, outages have not been the focus because of
the imbalance in the market, but that changes now that the market is
tightening," said Richard Gorry, director of JBC Energy Asia.
U.S. output, down by 410,000 bpd this year and 800,000 bpd since
mid-2015, is expected to slide another 800,000 bpd in the next five
months, according to the Energy Information Administration.
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Latin America's crude oil production, suffering from
under-investment, fell 4.6 percent in the first quarter to 9.13
million bpd, a loss of 441,000 bpd from the same period a year ago,
according to data from individual countries and OPEC.
The largest decline was in Venezuela, which lost 188,000 bpd in the
first quarter as President Nicolas Maduro's government wrestles a
deep economic crisis.
Production is also on the wane across Asia Pacific.
China, the region's biggest producer and consumer of oil, is
expected to see a 6 percent drop in crude output in 2016 due to
ageing fields and poor economics, Standard Chartered bank said.
Signs of tighter supply helped lift oil prices to more than
five-month highs last week. U.S. WTI crude hit an intraday high
above $46 a barrel on Thursday, within striking distance of recent
peaks. [O/R]
Nonetheless, with rising Middle Eastern output, near-record Russian
production and brimming storage tanks, the global glut is set to
stay for some time.
Brent futures for delivery five years out are only at a small
$10-per-barrel premium to one-month contracts, an indication the
"lower for longer" price scenario may linger.
(Additional reporting by Amanda Cooper in LONDON, Marianna Parraga
in HOUSTON, and Liz Hampton in EDMONTON; Editing by Andrew Hay and
Himani Sarkar)
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