CRUDE markets have entered an interesting phase. Market prices jumped almost 2 per cent to a six-week high, mid last week after a US report showed a big drawdown in crude and petrol stocks along with a surprise drop in distillate inventories.

Last Wednesday, the Energy Information Administration (EIA) said US crude stocks fell 4.7 million barrels during the week ended July 14.

The EIA said distillate stocks decreased 2.1m barrels and gasoline (petrol) stocks declined 4.4m barrels. The drawdown occurred even as EIA said US production climbed to 9.43m barrels per day (bpd) — the highest since July 2015.

Yet, despite the drop, the current US oil stocks, at roughly 490m barrels, remaining well above the five-year average. And in the meantime, the US production is also increasing, having gone up by almost 12pc since mid-2016 to 9.43m bpd — the highest since July 2015.

This is putting pressure on the markets despite the Opec endeavors. And some Opec producers, seem to be losing patience on the emerging situation, making the overall scenario, further hazy and murkier.

The Organisation of the Petroleum Exporting Countries (Opec) July oil supply was set to rise by 145,000 bpd compared to June, Reuters reported, citing data from PetroLogistics, a company that tracks Opec supply forecasts.

The increase in oil supply would push production above 33m bpd. Higher supply from the driving force behind the output cut regime, Saudi Arabia, besides the United Arab Emirates (UAE) and Nigeria contributed to the rise in the Opec producers’ output in July, PetroLogistics added.

Also in June Opec’s output rose by 393,000 bpd to 32.611m bpd. That rise was led by Nigeria and Libya, with extra supply also coming from Saudi Arabia and Iraq, market reports said.

And thus despite, the drawdown in US stockpile, all the above were enough to unsettle the markets further.

Markets thus tumbled, falling more than 2pc on Friday — wiping out in the process, all the week’s gains after the PetroLogistics report.

The US West Texas Intermediate futures ended on Friday’s session down by $1.15, or 2.5 pc, at $45.77 per barrel. Brent Crude fell $1.30, or 2.6pc at $48 a barrel by 2:38 pm ET.

Markets also remained focused on a key meeting between Opec and its non-Opec partners next week to discuss compliance to their agreed production cuts and ways to bring down inventory levels. “We’re keying on everything ahead of the Opec meeting,” John Kilduff, founding partner of Again Capital was reported as saying. “They (Opec) can’t add even a barrel right now.”

Markets appear facing increasing uncertainty after Opec-member Ecuador said it will start to increase production again due to revenue reasons, according to Helima Croft, global head of commodity strategy at RBC Capital Markets.

“Ecuador’s move underscores the sharp divergence in the economic fortunes of the sovereign producers, with the most cash strapped states in urgent need of financial relief and the flusher nations having the time, and perhaps even the incentive, to let the current cut run its course,” Croft said in a research note.

And while the battle to reduce the stockpiles to ‘reasonable levels’ continue, crude markets continue to stay wary of the growing US shale output.

Despite concerns in some quarters about long term prognosis of the US output, Schlumberger is reporting that the US shale continues to make a ‘rapid’ return. Schlumberger has reportedly ‘rapidly revived’ its idle oil-drilling equipment in North America during the second quarter, capitalising on an oil recovery.

Schlumberger’s revenue tied to US hydraulic fracturing — or “fracking” — soared 68pc over the first quarter, Fox Business reported.

Overall, North American quarterly revenue was up 18pc, or 27pc against last year, on strength in US shale production, the report said, emphasising that all of its US land businesses were profitable in the second quarter.

Also weighing in on the crude markets is the possibility of sales from the US Strategic Petroleum Reserves. Despite some strong voices opposing the move, Washington seems pursuing the idea to sell from its roughly 700m barrels of crude accumulated over the years, in the reserves.

Already this year, Washington has completed two of more than a dozen planned sales of reserve oil, auctioning off about 16m barrels.

All these are impacting the markets.

And thus, despite some spikes here and there, the overall, mid to long term crude scenario does not appear healthy and robust.

With the overall crude scenario in for an extended battle of nerves, markets are sceptic, ready to respond to the slightest hint of glut and softness. Who wins remains to be seen?

Yet, longer term, oil markets seem destined only to lose ground ­ — further.

Published in Dawn, July 23rd, 2017