Oil News: OPEC Cuts Supply Forecast As the Oil Glut Eases

By Markets Fool.com

The crude oil rally continues after OPEC announced it was cutting its 2015 forecast for oil supply growth from non-OPEC nations. OPEC noted that the rapid decline in the U.S. rig count should lead to an easing of projected growth in oil supplies this year. The news sent the price up oil up in early morning trading as the price of U.S. oil benchmark WTI crude oil continues its rally: It has steadily risen for the past two weeks and is now more than 20% off its bottom.

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What OPEC sees
The U.S. rig count has rapidly declined over the past few weeks. The latest data from Baker Hughes Incorporated shows that the U.S. rig count dropped by 83 last week, which is the ninth straight week the U.S. rig count has fallen. Just since the start of the year alone, the U.S. rig count has fallen by 342 rigs, and the rig count is now at its lowest level since December of 2011.

This should yield slowing production growth, or even declining production later this year, as the rig count is the key to adding new oil supplies in the U.S. As the following chart shows, the rapid increase in the rig count earlier this decade has fueled a tremendous rise in U.S. oil production over the past few years.

US Oil Rotary Rigs Chart

US Oil Rotary Rigs data by YCharts.

That being said, overall U.S. oil production is still expected to grow this year by 820,000 barrels per day as oil companies have enough cash to keep drilling. However, that's half the growth recorded just last year, as the declining rig count is now expected to shave another 130,000 barrels per day from supply. Further, oil companies have continued to revise spending plans for this year, so it's quite possible production won't grow as fast as current projections would seem to indicate, as the industry has taken the current supply glut seriously.

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What this means for the markets
OPEC sees this dramatic drop in rigs cutting deeply into projected supply growth, especially when combined with output reduction from other non-OPEC countries like Colombia and Canada. Factoring in these supply reductions, it's giving OPEC the confidence to slash 420,000 barrels a day from its 2015 supply forecast, and taking its non-OPEC supply growth forecast down to 850,000 barrels per day for 2015. OPEC sees this directly impacting its operations, as the cartel is raising its forecast for demand for the oil it produces by 400,000 barrels per day to 29.2 million barrels per day this year. However, that's still about a million barrels per day less than its expected output of 30.2 million barrels per day.

That said, it still sees global oil demand growing in the year ahead. Its current forecast of 1.17 million barrels a day of additional demand remains unchanged as it sees overall demand heading to 92.3 million barrels per day. However, at some point, the low price of oil could begin to fuel a demand response from oil consumers. There are some green shoots of a demand response in theU.S.: Gasoline consumption is starting to rise as U.S. drivers start to take advantage of low gas prices by driving more.

Meanwhile, China also had strong oil imports last month as it recently commissioned new refining capacity. However, its demand growth is still expected to slow from 10% last year to just 3% this year as its economy continues to slow down, but that could change as low oil prices could stimulate more demand in China. That's especially true after Saudi Arabia cut the price at which it's willing to sell its oil to Asia last week in order to stimulate more demand for its oil in the region.

Investor takeaway
The oil industry is slowly working its way through the current oversupply. The recent reduction in rigs drilling in the U.S., when combined with activity reductions elsewhere, has cut the projected oversupply by roughly a third. That means the oil industry needs to keep cutting or demand needs to pick up so that the last million barrels a day of oversupply can be wiped out. Until that happens, it's likely to continue to be a bumpy ride for the oil industry -- as well as its investors.

The article Oil News: OPEC Cuts Supply Forecast As the Oil Glut Eases originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.