The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, jumped an average of 7% last month.
Not surprisingly, the Organization of Petroleum Exporting Countries (OPEC) played a pivotal role in oil’s April surge.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could prompt more upside for oil this year.
“Compliance with the OPEC/non-OPEC deal hit yet another record high because of a 70,000-bpd dip in April, putting collective production levels at 32.12 million barrels per day (mb/d),” reports OilPrice.com. “The losses are largely the result of ongoing declines in Venezuela, plus deteriorating production from aging oil fields in Angola. The strong cohesion among OPEC’s other members helped push the group’s compliance rate in April jumped to 162 percent, according to a Reuters survey, up slightly from March.”
Inside The OPEC Catalyst
OPEC’s ability to be unified in its output reduction efforts is crucial at a time when Russia, the world’s largest producer; and the U.S. are pumping oil at near record levels.
“Overall, OPEC collectively produced 610,000 bpd less than its stated target in April. That is significant gap. Because most oil market forecasts assumed OPEC would adhere closely to the production targets, and not under produce, most analysts predicted at the start of 2018 that the oil market would see inventory builds again in the second quarter. The severe production losses in Venezuela and Angola, combined with strong demand, suggests that won’t be the case,” according to OilPrice.com.
Some market observers are so bullish that they expect oil to return to triple-digit prices, levels some OPEC members, including Saudi Arabia, would love to see.
Some traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.
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