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What’s up with oil lately? Well, “down” would probably be more accurate since oil has been trending lower since mid-April. So, what’s been weighing down on oil lately? Why has OPEC’s oil cut deal lost its magic? Why has oil erased its gains from OPEC’s oil cut deal? And what oil-related updates should you keep in mind going forward?

U.S. WTI Crude Oil: Daily Forex Chart
U.S. WTI Crude Oil: Daily Forex Chart

U.S. oil rigs continue to increase

Data compiled by energy services Baker Hughes show that U.S. oil rigs have been increasing at a worrying pace, increasing by six to bring the total to 703 during the week ending on May 5.

Source: Baker Hughes
Source: Baker Hughes

According to market analysts who are religiously keeping count, this marks the 16th consecutive week of increase in U.S. oil rigs. Also according to the same market analysts, the current total of 703 is most since April 2015 and more than double last year’s 326.

Worse, the increase in U.S. oil rigs are beginning to manifest as higher U.S. oil output. In fact…

U.S. oil output expected to surge in May

According to the U.S. Energy Information Administration (EIA), U.S. shale oil production is expected to increase to 5.19 million barrels per day this month.

Source: The EIA
Source: The EIA (Click to Enlarge)

 

That’s 124K barrels per day more than in April and is the largest monthly increase in two years, market analysts say. Yikes! And for reference, Russia and Saudi Arabia, the two oil-producing behemoths, produce around 11 and 9 million barrels per day respectively.

And most unfortunately (for oil and Loonie bulls), U.S. crude oil inventories remain elevated. In fact, inventory levels are even slightly higher compared to a year ago, as of the week ending April 28, 2017. And remember, the U.S. is one of the biggest oil importers on the planet.

Source: The EIA
Source: The EIA (Click to Enlarge)

China worries weigh on oil

Oil has recently felt the pain from China in two ways. The first was thanks (or no thanks) to the liquidity crunch in China due to the leverage crackdown launched by the Chinese government, which would make conditions tougher for speculators. As Pip Diddy noted in last week’s weekly recap, this was apparently one of the major reasons for the commodities carnage last week, with oil being one of the main casualties.

And things currently don’t look too good, since Chinese financial regulators seem intent to impose more rules and deleverage further.

The second (and more recent) is the 8.8% drop in Chinese oil imports during the April period, which brings China’s oil imports to 8.4 million barrels per day after peaking at a record high of 9.17 million back in March. And with PMI readings in retreat, that made market players a bit worried about future demand from China.

OPEC to extend its oil cut deal?

OPEC members are scheduled to meet on May 25, and an extension of OPEC’s oil cut deal would likely be on the table.

Adeeb Al-Aama, Saudi Arabia’s OPEC Governor, told the press back on May 5 that:

“There’s an emerging consensus among participating countries on the need to extend the production agreement reached last year.”

“Based on today’s data, there’s a growing conviction that a six-month extension may be needed to rebalance the market, but the length of the extension is not firm yet.”

And despite their differences on Syria, it looks like Russia, the biggest non-OPEC oil producer, would likely play along since Russian Energy Minister Alexander Novak told journalists on Monday (April 8) that:

“We are discussing a number of scenarios and believe extension for a longer period will help speed up market rebalancing.”

And Saudi Energy Minister Khalid Al-Falih even added that:

“[They’re] rather confident the agreement will be extended into the second half of the year and possibly beyond.”

Great! But will this deal be sealed? And more importantly, will oil finally be able to regain its mojo? After all, market analysts, including from the EIA, are already saying that rising U.S. oil output will continue to put a cap on oil prices. I guess we’ll soon be finding out.