In Focus: Demand may cap oil price

The benefits of Opec’s agreement to cut output have proved elusive. With less than three weeks to go before the group’s next meeting, something is very, very wrong as far as oil producers are concerned.

And they have no easy solution to put it right. The oil price is not far off where it was in November before Opec and friends agreed to cut output. Brent briefly fell to within 30c a barrel of its pre-meeting price last week.

Even without that brief dip, Saudi Arabia is now earning less from its oil sales than it was before concluding a deal that was meant to kick prices up to $60 a barrel. The rapid recovery in US oil production is eroding the effectiveness of the plan.

That erosion was compounded last week by news that Libya — one of two members exempt from the arrangement — had restored output from two of its biggest fields, taking production to the highest level since December 2014. Nigeria, the other member spared cuts, plans to restore exports from its Forcados terminal next month, potentially adding another 200,000 barrels a day to supply.

While the recovery in both countries is fragile, it could nevertheless not have come at a worse time for the rest of Opec. Oil supply is still expected to lag demand by a healthy margin in the second half of the year, resulting in a big reduction in the excess inventory — as long as the cuts are extended and compliance remains good. At least, that is what forecasts say.

The International Energy Agency sees inventories falling at a rate of around one million barrels a day this quarter. However, there are warning bells ringing. There are worries about over-estimating the strength of global oil demand amid the headwinds to demand growth in the US.

- Bloomberg