Why I Remain Bearish On Crude Oil

OPEC Says ‘Plentiful’ Global Oil Supplies Outpace Demand

The Organization of Petroleum Exporting Countries said that global oil supplies are outpacing demand levels, keeping its forecast for world consumption this year unchanged.
OPEC, scheduled to meet next month, is producing 8.3 percent more crude than it considers necessary this quarter, data released today by the Vienna-based group show. This has helped inventories in developed nations to reach “comfortable levels,” equivalent to about 59 days worth of consumption, according to an e-mailed report.

“Higher OPEC crude oil production underscores the current trend of plentiful supply in excess of market requirements,”OPEC’s secretariat said in its Monthly Oil Market Report.
Brent crude futures have fallen 10 percent in the past two months, trading today at $113 a barrel, as Europe struggles to resolve its debt crisis and the global economic recovery sputters.

OPEC, responsible for 40 percent of global oil supplies, said in the report it bolstered production by 320,000 barrels a day in April to 31.62 million, led by increases in output from Iraq. Saudi Arabia increased supply by 56,500 barrels a day to 9.9 million, according to OPEC estimates which are based on secondary sources.

Production Excess

The world will consume 88.7 million barrels of crude a day this year, about 900,000 barrels a day or 1 percent more than in 2011, the organization said. That’s 40,000 barrels a day higher than the group projected in last month’s report.

April’s production level is about 2.4 million barrels a day more than the 29.2 million that OPEC estimates its 12 members need to provide in the second quarter. The organization forecasts it will need to supply 30.9 million a barrels a day in the third quarter. For 2012, it estimates that 30 million barrels a day are required, in line with the formal quota agreed at the group’s last meeting in December.

My view:

What is particularly notable in this report is the fact that much of the increase in production comes from Iraq.

Substantial pipeline infrastructure has been built in Iraq in the last few years, and will large oil fields starting to come online, its contribution to OPEC is only just beginning. 

It is important to realize that Iraq has no oil production quota.  Its contribution to OPEC could become very large over the next 2 to 4 years.

Short of a major regional war breaking out in the Middle East that disrupts supplies, my view remains bearish on oil prices in the intermediate to long term time frame.