(MENAFN- Arab Times) The rally in international oil prices looked to have slowed as May came to an end. Dated Brent closed the month at $63.6 dollars per barrel (bbl), down $1.3/bbl (-2.0%) from the start of the month while benchmark US crude, West Texas Intermediate (WTI), remained around $60.0/bbl, gaining slightly by $0.63 (1.0%) on the beginning of May. Kuwait Export Crude (KEC), meanwhile, fell by $1.4 (-2.3%) to close at $59.1/bbl. Nevertheless, on a monthly average basis, international prices in May increased for the second month in a row.
During the last week of May, Brent was forced lower as a result of an overhang of crude supplies from West Africa and increasing crude coming out of storage. A resurgent US dollar was also a factor.
With the US importing less and less oil, crude supplies from Nigeria, Angola and Algeria, for example, have been especially hard-hit; African crudes have consequently flooded the Atlantic Basin in search of buyers, pressuring prices. Moreover, the recent oil price rally has also rendered crude storage less profitable than before, leading to increasing quantities of crude hitting the markets. While the futures curve still remains in contango, with prices for future delivery higher than prices for immediate delivery (spot prices), the difference, or spread, has been narrowing in recent months; having reached a 2015-high of $19.5 in January, the spread between the spot price of Brent and the futures price for delivery in December 2016, for example, narrowed to $6.9/bbl at May's close.
Brent futures prices were trending lower in recent weeks. Prices for delivery in December 2015 through to December 2017 were ranging between $67.8/bbl and $71.5/bbl. A month earlier, at the end of April, Brent futures had been ranging slightly higher, between $69.7/bbl and $73.3/bbl.
In contrast to Brent's experience, WTI, at just over $60.0/bbl, is trading at close to its highest level in 2015. Reflecting WTI's relative strength and Brent's weakness, the price spread between the two crudes narrowed to below $5.0/bbl € the narrowest in 5 weeks. WTI has been supported recently by supply outages in Canada resulting from wildfires and, more broadly, by signs that the hitherto relentless production of shale/light tight oil (LTO) was finally beginning to slow down in the US. The drawdown in US commercial crude stocks accelerated in May after stocks reached an 80-year high of 490 million barrels in April, while crude refinery runs increased in response to stronger demand for gasoline etc. Meanwhile, US drilling activity, as measured by the count of operational oil rigs, continued to decline during May; active US oil rigs were down by 60.0% to 646 since their peak of 1,609 last October.
According to the International Energy Agency (IEA), world oil demand has been gaining momentum in recent months on the back of colder winter temperatures (stimulating demand for heating) and improving economic activity in India, OECD Europe and Asia Oceania. Since bottoming out at a five-year low of 210,000 barrels per day (b/d) in 2Q14, demand growth has steadily risen every quarter to reach a high of 1.4 million barrels per day (mb/d) in 1Q15.
For 2015 as a whole, the IEA has left its forecast for world oil demand growth unchanged from last month, with demand expected to increase by 1.1 mb/d in 2015, to 93.6 mb/d. This compares with an increase of 0.7 mb/d in 2014.
Total OPEC crude oil production came in at 31.4 mb/d in April, according to OPEC data*. This is the second month in a row that supply has exceeded 31.0 mb/d and the twenty-sixth consecutive month that OPEC's output has topped the group's 30 mb/d official production ceiling.
Saudi Arabia continued to ramp up production; its output of 10.3 mb/d in April was a post-1980 high and came as the kingdom expanded its refining operations in response to stronger international and domestic demand. For the time being, with international oil prices rising and signs that US oil production growth is slowing, the Saudi strategy of maintaining rather than cutting oil production in order to preserve market share appears to be vindicated. Indeed, bucking the trend of cost-cutting by international oil majors, the kingdom, along with Kuwait and the UAE, has been boosting its investments in exploration and production; according to Baker Hughes, an oilfield service company, these three oil exporters are utilizing a record number of drilling rigs.
Kuwait's output has held steady at around 2.85 mb/d for the last four months, with the country seemingly able to compensate for the loss of the 330,000 b/d offshore Khafji field in the Neutral Zone last October, which it shares equally with Saudi Arabia, by boosting production from other fields. Output is likely to take a hit in May, however, with the departure of Saudi Chevron, operator of the 220,000 b/d Wafra field. It is not clear whether Kuwait will be able to rely on production from some of its other fields to fully offset the loss of Wafra.
Crude supply from both Iraq and Iran topped 3.0 mb/d in April. Iranian production looks to be increasing ahead of a potential deal on the country's nuclear program in June. Expectations are high that Iran will be able to finally return to the oil markets during the second half of the year.
Non-OPEC production looks to have declined slightly in April, by 260,000 b/d to 57.9 mb/d, according to the IEA. This was mainly due to a contraction in North American output, specifically Canadian and Mexican production. US production growth also looks to be slowing amid continuing declines in drilling activity and reductions in capital expenditure that have curbed shale/light tight oil production growth. According to the EIA, total US production growth is expected to slow down from 9.5% year-on-year (y/y) in April to 7.4% y/y by the end of June.
Despite the slowdown in the US, the IEA has revised up its forecast for non-OPEC supply growth in 2015 from last month's report, by approximately 200,000 b/d, to 0.83 mb/d. The IEA has noted the robust growth of 2.3 mb/d y/y recorded in the first quarter of the year which resulted from increases in output in non-OPEC countries such as Brazil, Russia, China and Malaysia.
The upward revision to non-OPEC supply has consequently lowered the 'call' on OPEC for 2015 by 300,000 b/d to 29.2 mb/d. This is an estimated 2.2 mb/d below OPEC's current production.
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