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OPEC Admits It Has A Problem: It Is Still Producing Too Much Oil

In its just released lastest market report for the month of July, OPEC admitted it has a problem: more than six months after the Vienna deal that was supposed to bring supply and demand in balance, the oil cartel confirmed it is pumping too much, not only in 2017, but also in 2018, blaming shale production as the primary reason behind the oversupply.

First, looking at historical data, according to secondary sources, production among the 14 OPEC member states rose by a whopping +394k b/d in June to 32.611mb/d.  The biggest monthly increases took place in those nations that had previously been supply constrained and which are exempt from the output cut accord: Libya +127k b/d, and Nigeria +97k, although even Saudi Arabia saw a substantial pick up in production, which rose by +51k b/d m/m to 9.95m b/d, the highest since the start of the year. More ominously, in direct communications to OPEC, Saudi reported a monthly increase of +190k b/d m/m, up to 10.07m b/d, suggesting that as discussed yesterday, Saudi commitment to production cuts may be "waning."

In total, OPEC admitted that output exceeded demand in 1H this year and was set for overproduction in 2018: the total output of 32.6m b/d in June was more than the 32.2m b/d it expects will be needed in 2018.

Just as striking was the report’s suggestion that OPEC and non-OPEC’s accord to cut production was not deep enough according to Bloomberg calculations: despite reducing production, the organization’s data show it oversupplied markets by ~700k b/d in 1H this yr.  Still, surplus oil stockpiles in developed nations fell in May to 234m bbl; if OPEC maintains June output levels, it will reduce global surplus by ~70m bbl in 2H, although as we reported previously much of this is due to US oil exports which artificially depressed US commercial inventory stocks.

And the punchline: OPEC expects to oversupply global markets markets by ~900k b/d in 1Q next year, with US shale scapegoated as the culprit for OPEC's failure to bring the market back into equilibrium: Non-OPEC supply to grow by 1.14m b/d in 2018, up from 800k b/d in 2017.

We wish OPEC the best of luck in getting US shale to produce less not more.

On the demand side, OPEC sees global oil demand rising 1.26m b/d, or 1.3% in 2018 to 97.65m b/d; its first estimate of 2018 demand growth was little changed from its unrevised forecast for 2017.

Discussing the demand side, the OPEC chief said the current oil-price cycle is driven by supply. OPEC's unwillingness to discuss the demand side may suggest to skeptics that it is not so much the supply side, which everyone knew would be in excess thanks to shale, but indeed the demand aspect, where OPEC is facing problems, especially in India and China, whose demand growth is now projected to decline, especially if as some have suggested China's SPR needs have declined sharply in recent months.

Meanwhile, as a first step to controlling what OPEC can control, namely supply, OPEC chief Barkindo said Libya and Nigeria are expected to send representatives to OPEC, non-OPEC Joint Technical Committee meeting in Russia on July 22, where according to some, they will be asked to also enforce production caps on their output, joining the rest of OPEC in limiting supply.