Halfway into 2017's oil supply cut, Asia remains awash with fuel

The Organization of the Petroleum Exporting Countries and other exporters including Russian Federation agreed previous year to cut output by around 1.8 million barrels per day in the first half of 2017, but so far the move has had little impact on inventory levels.

However, as the spread widens, the economics of oil production may help bring it back in line. At the same time, Fitch suggests that oil production from Azerbaijan is also on the up, with output set to increase by 4.7 percent this year.

Stat of the day comes from the EIA, which shows that crude by rail in the USA averaged 477,000 bpd last year (including shipments from Canada), down from 754,000 in the year prior. Combine this with any rumblings that OPEC may not extend cuts past May 25, and market sentiment remains extremely volatile despite a record number of long positions in the crude market. For more on crude oil prices, read Part 1 of this series.

With respect to the supply-side of the equation, the market has shown concern about the rebound in shale-related activity in the U.S. The current trend of overall supply, however, is consistent with our expectations.

The result is a market awash with fuel.

The destinations for crude cargoes provide evidence of the oversupply, according to JBC Energy GmbH, an oil consultant based in Vienna.

Refineries are usually willing to buy a range of crude grades but will blend them to achieve a fairly steady quality of intake in terms of density and sulfur (a well as acidity and heavy metals content). At this time around, The US Producers are actually keen on taking benefits of the mounting prices to turn up production.

OPEC's cuts early in the year pushed up Middle East Dubai crude price against the Global benchmark Brent, allowing oil from outside the Middle East to head to Asia. West Texas Intermediate (WTI) crude was up 76 cents, or 1.6 per cent, at $48.48 per barrel, its first increase in eight days.

A record 10.5 million barrels of Russian Urals will arrive in Asia between April and June, Eikon data shows. Thus, even the most dominant player from the perspective of crude oil imports accounts for around 16% of the share of the world's crude oil imports. The major Australian and Brazilian iron ore producers (particularly Vale, Rio Tinto, BHP Billiton, and Fortescue) have access to low-cost iron ore reserves and can continue to operate profitably at lower iron ore prices as compared to most other global producers.

In the past decrease in crude oil price was matched by the government with the frequent increase in taxes which meant that consumer did not entirely benefited from lower prices.

With few signs that producers will cut supplies deeply enough to end the glut, and indicators that output is rising in the United States C-OUT-T-EIA, traders say only strong demand can eventually rein in the surplus. Interestingly, there is a great deal of similarity in the supply-side dynamics of the trade in the two commodities as well, though the demand-side dynamics are fairly different.

"Enduring excess supply could be eased by a robust demand growth", said Maugeri of the Belfer Center.