OPEC may be considering putting a limit on how much Nigeria and Libya can produce.

Growing output from the two countries has added to existing anxiety about the global glut.

The market failed to sustain a rally even after U.S. data on Thursday showed the nation’s crude stockpiles dropped by 6.3 million barrels, three times as much as expected.

While the strong draws are a step in the right direction, multiple weeks of the same are now needed for the rebalancing.

A surprise fall in U.S. production in April and oil rigs last week may ease concerns that U.S. crude production is ramping up too aggressively

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OPEC compliance and lower U.S. oil inventories could prompt higher oil prices in the coming weeks.

“A further pillar of price support came as the relentless surge in U.S. drilling activity took a break,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd. in London. It “suggests some producers are starting to feel the pinch from the recent slide in prices.”

OPEC and non-OPEC producers have agreed to extend production cuts to the end of Q1 2018. The misunderstanding, we believe, in the market is that this isn’t really a production cut. If we look at production data leading up to the November 2016 producer meeting, OPEC and non-OPEC producers like Russia ramped up oil production. In our view, and this is where we differ greatly from the consensus, the cuts currently in place by both OPEC and non-OPEC are really just a pullback from max production output.

This differentiating view is important because it sets the precedence for how participants expect OPEC and non-OPEC to act post the production cut agreement. If in fact, OPEC and non-OPEC were producing at maximum capacity, and the production cut agreement was just a disguise for tapering off production, then markets should expect the “production cuts” to last well into 2018 as well.

The capex reduction from 2014 to 2016 will set precedence for the next oil price boom. The cure to low oil prices has always been low oil prices, and this time is no different despite short-term cycle barrels (U.S. shale) being in place.

Market participants tend to anchor to the latest price range and making up a narrative to fit it.

This is the first real big red flag. Secondary sources already pin Venezuela’s production averaging below 1.9 million b/d, and there are no legacy projects that will come online in the future making Venezuela’s production highly susceptible to a move to 1.4 million b/d by the end of 2018.

The second red flag is U.S. shale production growth of 1.2 million b/d. According to consultants, for U.S. shale production to average 1 million b/d+ growth again, it requires production growth from not only the Permian to reignite, but also Eagle Ford, and Bakken. Personnel requirements under a 1 million b/d production increase will push servicing costs up 45% to 60% or back to pre-downturn pricing. Hiring and personnel issue will likely cap production at most 800k b/d growth.

MS has Colombia production remaining stable at 800k b/d, when clearly the country’s production is trending downwards closer to 600k b/d by end of 2018 due to lack of capex investment.

IEA has been a poor forecaster of oil demand growth. In fact, since 2014, IEA has underestimated oil demand growth by an average of 975k b/d. Last year, IEA fared better as it only underestimated demand growth by 600k b/d, but the delta in its demand growth from the start of the year cannot be ignored.

We think the market will be surprised to see global crude storage rebalance back to the five-year average by the end of this year. The beginning of this year was plagued by offshore storage of 85 million bbls moving back into visible onshore storage. The second half of this year should see demand outpacing what the consensus currently expects and imports drop into visible storage.

We think the oil markets are just combating a period of depressed sentiment rather than worsening fundamentals.

The investment community suffers from information fatigue. Important data trends like capex spending only get updated twice a year through E&P guidance and that usually projects long-term supply, but because of the short-term(ism) of the market, people want daily and weekly reports.

For oil, we follow “the other guys” that make up almost half the world’s global oil supply. This is the area everyone is neglecting, but it could be the reason why oil prices boom in the next cycle. In addition, we follow emerging market trade flows, because it has a high correlation to predicting global oil demand growth.

OPEC has lost its grip on the oil market, but crude prices will likely set a bottom in the low $40s per barrel, according to the latest CNBC Oil Survey.

Sixty percent of participants agree that OPEC has lost control of the oil market, and the same percent also expect the cartel to continue its efforts to “jawbone” or talk up prices.

Just over half — or 53 percent of the participants in CNBC’s latest survey — say the bottom for oil prices is likely to be in the low $40s per barrel. However, 70 percent would not rule out a further drop into the $30s. Forty-six percent see it holding in the high $30s if it does go below $40 per barrel.

Forty-seven percent of the 15 oil market experts say there is more downside risk, but 40 percent say there should not be. Oil prices are expected to end the year between $40 and $49 per barrel, according to 47 percent, while 33 percent see prices in the $50 to $59 per barrel range.

Oversupply was cited by 93 percent as the biggest factor influencing prices right now, and 80 percent expect it to be the biggest factor for the remainder of the year. Just 7 percent see demand as the biggest issue. Seven percent see geopolitical threats as a bigger factor affecting prices, and 6 percent expect OPEC will be the greatest influence in the second half of the year.

Forty-seven percent believe demand is stronger but 40 percent believe it is flat. Thirteen percent say demand is trending weaker.

Commodities analyst Dennis Gartman, publisher of the Gartman Letter, says that the world must understand that the hydraulic fracturing and horizontal drilling technologies used by U.S. drillers have not even begun to be used in other parts of the world.

“It WILL, the effects of which are obviously long term very, very bearish,” he wrote in comments supplied with survey results. Gartman said U.S. technology will expand to Russia, Mexico, China the Middle East and Africa.

The Deputy Crown Prince of Saudi Arabia knows these things as well as anyone and it is his intention to sell his country’s oil reserves as quickly as he is able to secure what ‘wealth’ he can before crude oil at some point in the next two or three generations falls to near zero and is used only as a source of product production and not as a fuel for internal engines. He ‘gets’ it; few others around him do,” Garman wrote.

Mohammed bin Salman, now crown prince, has been promoting a program to diversify Saudi Arabia away from its dependence on crude. As part of the plan, the kingdom hopes to take its state-owned oil giant, Saudi Aramco, public. Analysts say that is one reason Saudi Arabia is willing to keep to an agreement to cut production, hoping it will help stabilize the market and boost prices.

The increase in production by U.S. shale drillers, or frackers, has been a key issue for the market, with U.S. output at about 9.3 million barrels per day. According to the CNBC survey, 60 percent say President Donald Trump’s pro-energy policies have had no effect on prices, but 33 percent say they have hurt prices a little and 7 percent see a large negative impact.

“If frackers continue to push to 10 million barrels per day — oil will be in the low $30s by the winter,” wrote Anthony Grisanti of GRZ Energy.

Libya’s oil production has climbed to more than 1 million barrels a day for the first time in four years, further complicating OPEC’s struggle to regain control of the oil market.

The North African country is pumping 1.005 million barrels a day (…).  That would be the highest since June 2013, when Libya pumped 1.13 million barrels a day, according to data compiled by Bloomberg.

Libya, like Nigeria, is exempted from the cuts deal, though its oil production and exports remain vulnerable to disruptions by armed factions and restive workers.

Libya’a output has rebounded from only 690,000 barrels a day at the start of the year, with Sharara, the country’s largest oil field, resuming production last month. State National Oil Corp. Chairman Mustafa Sanalla said in April he wanted to boost national output to 1.1 million barrels a day by August.

Other fields have reopened, most recently the Abu Attifel deposit which resumed production last month and is now pumping about 81,000 barrels of oil a day, according to the person who gave the latest production figure. The Majid oil field restarted on July 1, with output at 4,500 barrels a day. Sharara has been also steady at 270,000 barrels a day, the person said.

Libya, with Africa’s biggest crude reserves, was pumping about 1.6 million barrels a day before a political uprising in 2011. The ouster and killing that year of former leader Moammar Al Qaddafi led to a collapse in central authority, and many foreign investors withdrew as armed groups fought for control of oil facilities.

Bloomberg Article : U.S. Strategic Crude Reserves Shrink to Lowest Level Since 2005

U.S. strategic crude stockpiles have dropped to the lowest level in more than 12 years as the shale boom reduces the nation’s need for an emergency buffer against shortages.

Crude oil and refined product net imports stood at 4.23 million barrels a day for the week ended June 23, down from a record high of 14.4 million in November 2005. “Given the fact that we don’t net import that much any more, we only really need 300 million barrels,”

These drawdowns won’t end any time soon. The Trump administration has plans to sell another 270 million barrels of crude from the SPR over the next decade to help reduce the country’s debts.

The reserve has acted as a buffer against natural disasters along the U.S. Gulf Coast, particularly hurricanes.

Three years later, Hurricanes Gustav and Ike disrupted crude supply to several refineries along the Gulf Coast, prompting the release of 5.39 million barrels of SPR crude.

The country’s emergency needs can now be covered with domestic crude supply, which is about 80 percent higher than a decade ago, thanks to developments in horizontal drilling and fracking that boosted production from areas that had been too expensive to tap. Domestic output reached 9.35 million barrels a day last month, the highest since August 2015, and is forecast to increase to above 10 million a day early next year.

The growth in U.S. production has been spread out all over the country, and not concentrated in areas like the Gulf of Mexico, where fields are prone to weather hazards, Dwivedi said. “We won’t knock off producing shale wells because of a storm.”

Bloomberg Article : Once Dominant, Oil Stocks See Influence Shrinking Everywhere

As recently as 2012, correlations between the S&P 500 Value Index and the benchmark’s energy companies were often close to 1, meaning perfect lockstep moves. Now it’s about half that, slipping to the lowest in nine years.

Just as it has in broader indexes, energy companies’ shrinking size has left them with less clout to sway the value category as a whole. Another factor is oil, a commodity that bounces around so much nowadays that anything tied to it stands an equally good chance of coming untethered from the rest of the market.

Moves in oil, once seen as an economic proxy, are now dictated more by the sector-specific narrative of supply outlook. Ari Wald, an analyst at Oppenheimer & Co. in New York, expects the high volatility to last for the next several quarters or possibly even years.

Typically, supply has been constrained and thus a strong economy has been correlated with a strong equity market, including strong performance in oil and energy, but this time around supply is not tight so the relationship is not there

Energy is likely not considered ‘value’ at this point due to the vulnerability of the sector to large swings in oil prices, driven not by the usual cyclical factors but rather by secular issues tied to supply and demand