In the supposed standoff between OPEC and US light tight oil (LTO), LTO appears to have blinked. Following months of cost cutting and a 60% plunge in the US rig count, the relentless rise in US supply seems to be finally abating. LTO production growth buckled last month, sending US crude output growth into reverse and bringing a multi-year winning streak to an apparent close. Inventories already feel the pinch. US crude stocks, the top source of recent OECD builds, posted their first weekly draw in 17 weeks at the end of April. Expectations that the market would start tightening by mid-year seem to be coming true - or so would have it the bulls who over the last month have given WTI crude a 14% price lift, and counting.
But that is only part of the story.
An end to US crude builds does not spell the end of all oil inventory increases. Not only does the latest US crude draw pale in comparison with the massive builds of the first quarter, but there are also signs that, even as crude builds slow, product stocks are picking up where crude has left off. US product stocks already built counter-seasonally in March - a month when China also posted record-high distillate builds. Preliminary data show OECD-wide product stocks stopped drawing and swung into growth in April. More such builds may follow as global demand goes through a seasonal soft patch and refining activity increases worldwide.
The slowdown in the LTO patch notwithstanding, global crude supply was up by a staggering 3.2 mb/d in April year-on-year, extending the first quarter's massive gains. While the price responsiveness of LTO was widely anticipated, the strong performance of some other sources of non-OPEC supply defied expectations. Russian oil companies seem to be coping exceptionally well with lower oil prices and international sanctions, thanks to a flexible tax regime that lightens their fiscal burden as prices drop and to steep cuts in production costs that came courtesy of the rouble's depreciation. Russian production jumped by a steep 185 kb/d year-on-year in April. For all its troubles, Brazil's Petrobras is also a supply success story of sorts. Even as its balance sheet problems curtail new spending, investments made long ago are finally paying off as one FPSO after another comes into production. Brazil output was up 17% year-on-year in the first quarter. Chinese production is also growing at a healthy clip, as is output from Viet Nam and Malaysia. Meanwhile, last month's vigorous WTI price rebound is giving LTO producers a new lease on life. Several large LTO producers have been boasting of achieving large reductions in production costs in recent weeks. At the same time, producer hedging has reportedly gone steeply up, as companies took advantage of the rally to lock in profits.
It would thus be premature to suggest that OPEC has won the battle for market share. The battle, rather, has just started. The move by the group's core Gulf members last November not to cut production in defence of prices was only the first step in a plan that includes actually ramping up output and aggressively investing in future production capacity - even as their non-OPEC counterparts keep tightening their belt. Bucking the global trend, Kuwait, Saudi Arabia and the UAE are all raising their rig count and expanding their drilling programs. Iraq and Libya, meanwhile, continue to raise production against all odds. And Iranian supplies hit their highest since July 2012, when international sanctions on Iran's crude exports came into effect, even as Tehran's ongoing talks with the P5+1 raise the possibility of its full return to international markets.
Recent signs of tightening in the US oil patch must be put into perspective. Amid continued political turmoil in the Middle East and North Africa, there is no lack of upside risk to prices - and downside risk to supply - in today's oil market. Given the central role of US LTO as a main source of projected incremental oil supply, a slowdown in LTO supply would certainly have a large impact on oil balances. But the rest of the oil patch is not standing still. As the market continues to rebalance, pockets of supply growth are emerging from unsuspected corners. Despite tentatively bullish signals in the US, and barring any unforeseen disruption elsewhere, the market's short-term fundamentals still look relatively loose.