Oil faces Opec split

Oil market rebalancing still seems far away, after false hopes of strong rebound. Brent on Monday, lost 3 percent, wiping off the last week gain, as anticipation of record high US oil production took the market over. Recall that the US oil production last month had peaked a 50-year high in excess of 10 million barrels per day.

The US oil rig count has been steadily growing without being exemplary. The US EIA report is due later this week, and most signals suggest that the US production would exceed 11 million barrels per day. And April oil production from the US is also slated to be highest ever, with more than 6.9 million barrels per day likely to be contributed from onshore shale.

The Venezuela impact that had offset the rise in US oil production seems to be receding.

The US oil production alone is all set to more than make up for the Venezuelan loss, and it could be as easily as the end of 2018, that the US overtakes both Saudi Arabia and Russia as world’s largest oil producer. The stable US dollar may keep prices in check, but the ever increasing oil inventory has sent enough bearish signals to the market.

All this while, the bigger change has been observed in Opec. Nothing is official yet, but the split is becoming likelier by the day, as Saudi Arabia and Iran have taken contrasting stances. Iran is seemingly unhappy with the rapid rise in US production, which has resulted in a sizeable dip in Opec’s market share – as US exports to Asia continue to grow.

Iran wants more production to limit shale’s growth, as it believes that oil at $70/bbl with strict production cut and strong compliance – is equal to playing in the hands of US producers. Only that, shale producers have also developed the ability and resilience to pump as much oil at even $60/bbl – a level that Iran is eying through relaxed production cut limits.

Saudi Arabia, on the other hand, appears insistent that oil be priced close to $70/bbl and is ready to wait longer to for the market to find equilibrium. The problem is that not every Opec member has pockets as deep as Saudi’s. Moreover, Iran seems restless to pump more oil in order to reach a sizeable scale to bring the production costs in control. The longer the deal goes on – the likelier it is to fall apart – and that might pave way for oil below $60/bbl again.