At the end of the day, cuts in US oil production are far more likely to bring some stability to prices than any agreement between Russia; Saudi or Venezuela.We might just be starting to see some movement on this front.

 

US oil production

 

Last week, US oil production fell to 9.1 million barrels a day. That's back to where it was in mid October and down 1.4% from the January high of 9.24m. It's probably a bit early to call this a trend but it's worth keeping an eye on

Recent estimates are that capital expenditure by major US oil companies this year will be half  the levels of 2015. The market has been wrong about capital expenditure and production cuts so far.  Improvements in productivity have stopped a big drop in the numbers of oil rigs flowing through to deeper production cuts. However, production is now down 0.5m barrels a day from the peak last April. The really large capex cuts now planned should flow through to deeper production cuts this year

Daily US oil production Source: Bloomberg Daily US oil production
Source: Bloomberg

 

 

 

 

US oil inventories and surplus

 

It's important to see any US production cuts in context of course. Significant cuts are needed just to stop the rot. Inventories continue to grow. They were up 3.5m to a record 507.6m barrels last week. To make matters worse, we are moving into a period of seasonal weakness in demand between February and May

The International Energy Agency estimates that the global oil production surplus is around 1.9m barrels a day. Demand is expected to grow 1.2m barrels a day this year but Iran will be adding to supply. US production probably needs to fall to at least 8.5m barrels to start stabilizing prices.

US oil inventories Source: Bloomberg US oil inventories
Source: Bloomberg

 

Market reaction - relief

 

While markets have been wrong about US production cuts so far, they  are still expecting  them, in fact counting on them starting to come through in coming months. Even though cuts are expected,  it's likely we will see some relief when if we finally begin to see evidence of more meaningful amounts coming off the table. Risk premiums could be reduced, especially in equity markets where oil markets and related bad debt problems have been a significant source of concern.