By Alan Murray and Geoffrey Smith
May 5, 2017

Good morning.

Big Oil – Exxon, Chevron, Conoco, Shell, BP and others – reported its best quarter in years over the last couple of weeks. Sustaining that performance looks an increasingly tough challenge. Smaller shale companies, still repairing the balance sheet wounds of 2015/6, may also be starting to fret again.

Crude oil prices slumped to their lowest in six months overnight. Analysts are pointing at a number of reasons: China, having started the year with a surprisingly strong economic performance, can now afford to spend the rest of the year focusing on stopping wasteful credit expansion than on supporting demand; the traditional pickup in demand seen in the U.S. has been smaller than expected; but most of all, there is a sense that the production cuts agreed by OPEC and other big non-OPEC producers in November have failed to end the global glut.

Only last week, Saudi officials were trying to argue that world stocks of crude were at least starting to trend sideways, as rising global demand gradually ate into surplus stocks. However, the rebound in U.S. production (up some 10% on the year) is stronger than Saudi and other producers had expected. Commercial crude stocks in the U.S. are still clearly higher than at any point the last 10 years, according to this week’s government data, and refineries pumping out way more gasoline than U.S. drivers need.

The OPEC deal and the prospect of faster growth under Donald Trump had been the two factors underpinning prices for the last six months. The markets’ trust in the latter had already has already been eroded by the new administration’s numerous false starts in policy. They now appear to have lost trust in the former too, even though OPEC, Russia and others look set to extend the current deal when they meet May 25th.

Enjoy the weekend, especially if it involves a long drive. Alan will be back on Monday.

Geoffrey Smith


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