Oil prices edged up early on Tuesday, lifted by statements that OPEC-leader Saudi Arabia was making significant supply cuts to customers, although rising U.S. output meant that markets remain well supplied. Brent crude futures were at $48.42 per barrel at 0044 GMT, up 13 cents, or 0.3 percent, from their last close. U.S. West Texas Intermediate (WTI) crude futures were at $46.21 per barrel, also up 13 cents, or 0.3 percent. Saudi Arabia, the world’s top oil exporter, is leading an effort by the Organization of the Petroleum Exporting Countries (OPEC) to cut production by almost 1.8 million barrels per day (bpd) until the end of the first quarter of 2018 in order to prop up prices. Other countries, including top producer Russia, are also participating.
During the first half of the year, there were doubts over OPEC’s compliance with its own pledges, as supplies, especially to Asia, remained high. Saudi officials now say they are making real cuts, including 300,000 bpd to Asia for July, although several Asian refiners said they were still receiving their full allocations. “Crude oil prices rose on the back of further supportive talk from Saudi Arabia. Energy Minister Khalid Al-Falih said that inventories are declining and reductions will accelerate in the next three week,” ANZ bank said.
Although other OPEC members, like Libya and Nigeria, are exempt from the cuts, and there have been doubts over the compliance of others, including Iraq, the club’s supplies have been falling since the the cut’s start in January. Trade data shows that OPEC shipments to customers averaged around 26 million bpd in the last six months of 2016, while they are set to average around 25.3 million bpd in the first half of this year.
Threatening to undermine OPEC’s efforts to tighten the market is a relentless rise in U.S. drilling activity <RIG-OL-USA-BHI>, which has driven up U.S. output <C-OUT-T-EIA> by more than 10 percent since mid-2016, to over 9.3 million bpd. The U.S. Energy Information Administration (EIA) says production will rise above 10 million bpd by next year, challenging top exporter Saudi Arabia.
Overall, oil markets remain well supplied. A sign of ample supplies is the Brent forward curve , which is in a shape known as contango, in which crude for delivery in half a year’s time is around $1.50 per barrel more expensive than that for immediate dispatch, making it profitable to charter tankers and store fuel instead of selling it for direct use.