HardAssetsInvestor

Written by Sumit Roy  |

January 09, 2013

US Oil Production Hits 20-Year High, But Prices Hold As OPEC Cuts

Details

We take a look at the latest developments in the oil market, including charts of all the major inventory categories.

The Department of Energy reported this morning that in the week ending Jan. 4, U.S. crude oil inventories increased by 1.3 million barrels, gasoline inventories increased by 7.4 million barrels, distillate inventories increased by 6.8 million barrels and total petroleum inventories increased by 10.9 million barrels.

Oil prices were little changed after the release of the latest inventory figures. The big jump in stockpiles mirrored the previous week’s sharp tax-related decline in inventories, leaving levels essentially unchanged in the period.

The most notable story in oil markets continues to be the steady ramp-up in U.S. oil production. Output in the country topped 7 mmbbl/d last week—the highest level in 20 years. That’s up a whopping 1.2 mmbbl/d, or 20 percent, from a year ago.

However, despite the significant increase in U.S. production, oil prices have held firm. That’s because a 1 mmbbl/d decrease in OPEC production since August has offset much of the increase in the U.S.

OPEC Crude Oil Production

Source: Bloomberg

OPEC output may need to continue to decline to offset gains in U.S. output, which is anticipated to steadily climb throughout the year. Otherwise, prices could fall significantly.

Traders remain reluctant to push Brent prices out of their well-established range between $107 and $117. WTI, on the other hand, has advanced to multimonth highs thanks to this month’s expansion of the Seaway pipeline’s capacity from 150 Kbbl/d to 400 Kbbl/d, which should help alleviate the glut of crude in the Midwest.

Bottom Line: Oil prices remain range-bound as OPEC production cuts offset the surge in U.S. output. OPEC production will have to continue to decline to prevent a potentially sharp drop in prices.

BRENT

WTI