U.S. crude inventory build was big, but oil prices remain above $40 per barrel

Crude oil inventories grew by 6.6 million barrels, far surpassing economist estimates which averaged just 733 thousand barrels for the week ended April 8, 2016. The build brought total U.S. inventories to 536.5 MMBO after a surprise weather-related draw last week. Oil prices fell on the news, but U.S. crude benchmark WTI has remained above the $40 per barrel mark at $42.05 as of 12:00 p.m. EST despite the build.

Oil prices climbed above the $40 mark following news that a group of OPEC and non-OPEC members would meet in Doha, Qatar, to discuss freezing crude oil production. The 20 member group represents more than 50 MMBOPD of production, or 64% of global daily production, according to a report from UBS today. The effects of a freeze have been called into question by many analysts who do not expect the deal to have much effect on fundamentals without Iran, which has said it has no intentions of joining the freeze.UBS OPEC Oil Production and Spare Capacity

“We believe that any agreement to freeze output which excludes Iran would largely be an acknowledgement of existing conditions at the main participants,” said UBS. “Current spare capacity is confined mainly to Saudi, and we believe that the prospects for capacity growth elsewhere within OPEC are limited.”

Fundamentals taking hold as U.S. oil production falls below 9 MMBOPD

Prices remained fairly stable following the news of the inventory build, however, as production is showing more signs of rolling over, as U.S. crude oil production fell below the 9 MMBOPD mark for the first time since October 2014, just before oil prices cratered. A 31 MBOPD drop in production week-over-week finally pushed U.S. production back into the 8-9 MMBOPD range, according to a report from BMO today.

The EIA also lowered its expectations for average U.S. production over the next two years this week, forecasting an average of 8.6 MMBOPD this year and 8.0 MMBOPD in 2017. Both were 0.1 MMBOPD lower than the EIA’s previous prediction. The EIA’s estimates showed production fell 90 MBOPD in March alone.

US crude oil production ahead of Doha meeting

U.S. production not alone in declines

Along with production in the United States, lower oil prices are beginning to hit production in other parts of the world as well. Smaller producers in Latin America and the North Sea are also beginning to pull the throttle back on their output, reports The Wall Street Journal.

In March, overall production in Latin America dropped below 8 MMBOPD for the first time in since March 2014. Nearly all of Brazil’s largest fields could see declines this year, and production in Mexico and Venezuela have also been tapering off.

Norway’s crude oil production grew by 4% to 1.56 MMBOPD in 2015, but is now expected to decline by 2% before gradually leveling off at 1.38 MMBOPD in 2019, according to the Norwegian Petroleum Directorate.

London-based research consultancy Energy Aspects recently revised its estimates for non-OPEC production declines this year to 700 MBOPD from 200-300 MBOPD previously. Energy Aspects expects demand will outpace supply and begin drawing down on global crude inventories by the middle of the year.

U.S. shale output remains the lynchpin

Analysts remain unsure about how far an oil price recovery could extend given the nature of shale production, however. Unlike large-scale projects elsewhere in the world, U.S. producers can bring production back online in a matter of months if prices recover enough to make the decision economical.

“The key is going to be, once we have a pickup in prices how does shale respond? The jury is out on that,” said Christof Ruhl, global head of research for the Abu Dhabi Investment Authority. Any significant increase in shale output could hold prices near their current level, or push them back below $40 per barrel again.

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