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OPEC’s Surprisingly High Compliance Rate Saves Oil For The Time Being

From Evan Kelly: Oil prices dropped to a three-week low on Thursday following a bearish data release from the EIA. Crude inventories broke a new record at 520.2 million barrels, and U.S. oil production figures jumped to 9.032 million barrels per day, a gain of 31,000 bpd from the previous week.

Rising production and inventories weighed on prices. However, a weaker dollar buoyed WTI and Brent towards the end of the week.

OPEC compliance reaches just about 100 percent. Data for February is in and it shows that OPEC increased its compliance rate. Saudi Arabia took on the additional burden, cutting deeper than it promised as part of the November deal. The oil kingdom cut output by 90,000 bpd in February from January levels, taking output down to 9.78 million barrels per day. Reuters puts the compliance rate at 94 percent, while Bloomberg has it at 104 percent. Saudi Arabia is making up for a handful of countries that are falling short on their commitments, including Iraq, the UAE, Angola and Venezuela. Plus, this does not take into account rising output from Libya, Nigeria and Iran. When included, OPEC is producing 415,000 bpd above its target. Moreover, Russia has not slashed its production beyond the 100,000 bpd reduction in January.

Saudi cuts prices for its crude for April. Saudi Aramco discounted its oil by 50 to 75 cents for its light oil to be delivered to Asia in April, and cut prices for its light and medium grades by 30 cents per barrel, according to the WSJ. They also offered discounts to oil heading to North America and Northwest Europe. The price changes do not necessarily mean much, but changes in prices have been closely watched over the past few years by analysts hoping to glean clues from Saudi officials on their strategy.

Oil to trade between $50 and $60. Daryl Liew of REYL Singapore sees oil trading within a range of $50 and $60 for much of this year. OPEC compliance will keep prices from falling but rising U.S. shale production will cap any price gains.Related: The Aussies Just Shaped The Future Of Renewable Funding

Natural gas inventories rise unexpectedly. Normally, U.S. natural gas stocks are drawn down in the winter as heating demand spikes, only to be replenished between April and November. But the EIA just reported a shocking increase in natural gas inventories, a major development given that winter is not over yet. The increase of 7 Bcf puts gas stocks at 295 Bcf above the five-year average for this time of year. With only a few weeks left of winter, the disappointing drawdowns suggest that the market will be well supplied for the rest of the year, potentially heading off any chance of meaningful price gains. Natural gas spot prices are already down 30 percent from their December peak, sitting at $2.80/MMBtu.

U.S. EPA scraps methane plan. Under the Trump administration, the EPA reversed this week the Obama-era request for methane data from oil and gas companies, the basis for which future methane regulations were to be drawn up. Without the data, the EPA would have a tough time designing methane regulations – which is exactly what the EPA under President Trump is hoping to achieve.

Trump’s energy cabinet confirmed. Former Texas Governor Rick Perry was confirmed this week as the new Secretary of Energy and former Congressman Ryan Zinke took the helm at the Interior Department.

Keystone XL exempt from “Buy American.” President Trump made a show of the fact that TransCanada (NYSE: TRP) would be able to build the Keystone XL pipeline, but would have to do so with American-made steel. He even signed an executive order calling on all new pipelines to be used with American steel. But a White House spokesperson told Politico that because the Keystone XL pipeline is not “new,” it won’t be subjected to those requirements. Some analysts question whether the executive order will have any legal power at all, since it only instructs the Commerce Department to develop a plan for the use of American steel. The upshot is that TransCanada will be able to build its project without any local content rules, keeping the cost of the project lower.Related: Are Oil Prices Really Driven By Supply And Demand?

Exxon goes big on U.S. shale. New ExxonMobil (NYSE: XOM) CEO Darren Woods gave his first presentation to investors this week, where he outlined a strategy to step up investment in U.S. shale. Exxon will allocate a quarter of its 2017 budget to short-cycle shale projects. The move will help the oil major navigate an uncertain market, as cash can be returned to the company much quicker from shale drilling than it can from the major offshore projects that Exxon has long been accustomed to. Still, Exxon will move forward aggressively on its large offshore discovery in Guyana, hoping to bring it online in the next few years.

Libyan violence takes place near oil export terminals. Libya’s major oil export terminals Es Sider and Ras Lanuf have been crucial elements in the latest upswing in Libyan oil production. But violence once again erupted near the terminal this week. Rival factions fighting for territorial control have torn the country apart, and this week airstrikes occurred within a few dozen miles of both ports. Libya is targeting a dramatic ramp up in production this year and next, but if the terminals were disrupted, those plans would likely be derailed.

The United States Oil Fund LP ETF (NYSE:USO) closed at $11.29 on Friday, up $0.12 (+1.07%). Year-to-date, USO has declined -3.67%, versus a 6.66% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #40 of 121 ETFs in the Commodity ETFs category.

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