Oil Falls Despite Ongoing Middle East Tension

Oil prices have fallen back over recent days despite the continued tension in the Middle East as rising rig counts and higher US shale output have created downward pressure. Rig counts rose 9% last week while, according to the latest EIA report, shale output is forecast to grow at 80,000 barrels per day over December to reach 6.2 million barrels per day.

Bullish OPEC Report Keeps Price Underpinned

The oil decline would likely have been sharper if not for the latest OPEC Monthly Oil Market Report which concludes that global and OECD commercial oil inventories have declined. At the end of 1Q inventories were at 3.03 billion barrels and 3.015 million barrels three months later. Over 3Q, inventories declined by a further 83 million barrels, marking a stark shift from the rise of 100 million barrels over the same period in 2016.

There are two clear factors driving the decline in inventories: the first is the surge in global demand which has risen 1.6 million barrels per day from 1Q – 3Q and the second is the growing co-operation between OPEC and non-OPEC producers. The combined co-operation between OPEC and non-OPEC producers has reached 102% compliance over the first three quarters of the year.

Oil Inventories To Fall Further

Global and OECD inventories are expected to fall further over the final quarter of the year which should keep prices underpinned as OPEC’s current projections see oil demand at around 33.5 million barrels per day, which is well above the current 32.6 – 32.7 million barrels per day production level.

In 2018 global oil demand is projected to grow by around 1.5 million barrels per day which again is well above the projected supply (both OPEC & non-OPEC) of 1.05 million barrels per day. OPEC’s current view is that oil inventories will stop falling at the beginning of the year as the market balances out, but it does not expect to see a rebuild. Inventory declines are then expected to accelerate over the second half of the year.