Tag Archives: OPEC

Oil Update: Mixed Results for the OPEC Deal – 2/13/17

OPEC and Russia are leading a push by global producers to end a three-year oil surplus that sent prices crashing and devastated their finances. And while prices initially rallied 20% on news of the OPEC agreement, concerns about rebounding U.S. drillers will fill the gap left by OPEC’s cuts are keeping a lid on prices. Regardless of how increasing U.S. output would make ineffectual any cuts, so far OPEC member compliance with the agreement has been better than expected while compliance from non-members has been weak.

Largest exporter of the group, Saudi Arabia, told OPEC that it cut oil production beyond its obligations under the deal to balance world markets, but independent review suggests otherwise. The kingdom reported that it reduced output by 717,600 barrels a day (b/d) last month, according to a monthly report from the OPEC compared to the group’s own estimates which put Saudi Arabia’s cut closer to a less impressive 496,000 b/d cut.

Saudi Arabia has also violated the spirit of the deal in a more subtle way: reducing domestic use of oil so it has more to sell abroad.

Saudis have always been huge consumers of oil and are only now starting to cut back. That change would allow them to export more while producing less. Oil consumption jumped 77% for Saudi Arabia between 2005 and 2015, topping even China, which grew 72%, according to data from BP.

Now Saudi Arabia’s actual domestic consumption of unrefined crude oil and its increase in production left a combined 3.5 million additional barrels available for refining or export compared with 2015, according to data from the Joint Organisations Data Initiative.

In regards to the group as a whole, in monthly report covering the deal, Iraq, Venezuela and Iran told OPEC they pumped more than allowed by the accord.

OPEC’s “secondary sources” numbers formed the baseline for the accord. Tellingly, Iraq had initially insisted that only statistics supplied by member governments should be used. Iraq’s own data currently shows that it had made 180,000 b/d in cuts of its 210,000 b/d target. Meanwhile, OPEC said Iraq cut 166,000 barrels and the independent International Energy Agency reported that Iraq cut output by only 110,000 barrels a day. 

Among OPEC members, Iraq was always expected to be one of the hardest to reign in. Both the Iraqi and Venezuelan governments are currently unstable (and in need of funds) explaining their reluctance to comply with the cuts that would mean bringing in less oil revenue. Only recently seeing the end of U.S. sanctions, Iran has also made it clear from the start that righting its atrophied energy sector takes precedent over any obligations to the group.

Still, estimates indicate a relatively high degree of compliance among OPEC members compared to deals in the past such as the one in 2009. According to the IEA, OPEC compliance peaked at 80% during the 2009 agreement period.

OPEC, which agreed to the cuts with 11 other oil-producing nations in December, is 92% compliant with its pledge to reduce output by 1.2 million b/d, Oil Minister Essam Al-Marzooq told reporters Monday in Kuwait City. Non-OPEC producers are complying at a lower rate, he said. The IEA reported similar numbers showing a historically high 90% compliance rate.

The same cannot be said for the 11 non-OPEC producers that agreed to join in with output cuts.

Compliance from OPEC members alone was never going to be enough to balance the market. If it were, then the group wouldn’t have had to ask other producers to join the agreement and cut their output by 558,000 b/d. So far, Russia and the other non-OPEC participants have cut just 269,000 b/d, according to IEA data, or compliance of about 48%.

Kuwaiti Oil Minister Essam Al-Marzooq, whose country chairs the committee that oversees compliance, is urging those countries to fulfill their commitments; however, those urgings are probably in vain since OPEC has no means of compelling compliance in any meaningful way.

In addition, the output deal expires in June and though OPEC members have said they will consider extending the cuts if necessary, non-OPEC members have not even suggested they might go along with an extension. With all the trouble, the oil market is still far from being back in balance. If the organization keeps output at January levels, supply would still outmatch demand by about 800,000 a day adding to already bulging global stockpiles.

OPEC Deal: Good Compliance, Pessimistic Reactions – 2/6/17

OPEC members seem committed to showing commitment to their deal for whatever that’s worth.

In OPEC’s initial agreement, production data compiled by analysts in the group’s secretariat will be the principal tool for judging whether members are complying with the deal. Notably, the data won’t cover non-members such as Russia. The committee also has no plans to use external agencies to verify implementation of the pledged supply curbs.

Still, non-official channels are happy to keep track for them. Tanker-tracker Petro-Logistics SA estimates that oil supplies from OPEC plunged in January in one of the first outside assessments of compliance. OPEC will reduce supply by 900,000 barrels a day in January, about 75% of the cut that the producer group agreed, according the Geneva-based consultant group.

The data suggests “a high level of compliance thus far into the production curtailment agreement,” said Daniel Gerber, CEO of Petro-Logistics.

An implementation rate of 75% is high relative to past deals such as the 2008 deal where it only reached 70%, according to Hasan Qabazard, OPEC’s former head of research.

For now, there’s no indication that the cuts will need to be extended beyond the initial six-month term, Algeria’s representative Boutarfa said at a recent meeting, echoing previous comments by the Saudi oil minister.

Unfortunately for OPEC, six months of cuts may do little to move prices. The U.S. rig count has been rising and, with a looming resurgence in U.S. output, analysts have their doubts about the efficacy of the OPEC agreement and any future deals the group could make. As the capacity for oil production in the U.S. rises and global demand for oil falls, the group’s power over the market is a fraction of what it once was during the 1973 Oil Embargo and resulting crisis.

The latest energy outlook by supermajor BP illustrates the market-share/price problem facing OPEC.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”. BP expects oil demand growth to slow down in the years to come and pegs the cumulative oil demand until 2035 at around 700 billion barrels, “significantly less than recoverable oil in the Middle East alone”.

In this view, low-cost producers — primarily OPEC nations and Russia — would try to seize more market share. BP predicts that the abundance of oil resources would prompt the lowest-cost producers to pump the low-cost barrels as quickly as possible before demand falls off.

However, OPEC has the recent experience of oil prices crashing weighing on it. After attempting to force high-cost shale drillers out of the market and seeing the resulting drop in oil revenue OPEC appears reluctant to return to a market-share strategy. But OPEC’s decision to cut supply is currently benefiting U.S. shale putting the cartel in a lose-lose situation.

Commenting on OPEC’s current and future relevance and influence on the oil markets, Wood Mackenzie said in an analysis last week:

“The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel. If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.”

Energy Security: Oil Independence A Long Ways Off – 2/3/17

U.S. Presidents pledging to make America independent from OPEC oil isn’t new. Energy security has always been a concern for nations, and reliance on imported oil from unstable regions has caused serious problems in recent times. Problems which lead to George W. Bush’s attempts to reduce imports from the Middle East saying the nation was “addicted to oil”, but vowing and doing are very different things. In the end, oil shipments from OPEC to the U.S. rose more than 10% during Bush’s time in office.

Independence from the Middle East would equate to replacing about 2.7 million barrels a day (b/d) in net imports, a 30% increase in current domestic output — currently ~9 million b/d after the already massive increase following the shale drilling and fracking boom.

Still, the new goal is more obtainable than it once was. U.S. oil production has risen significantly in the last decade, so the nation was nearing energy independence even without prompting from the White House.

And shale explorers in the United States are expected to increase spending four times faster than the global average this year. According to Bloomberg, the number of rigs drilling for oil and gas in the U.S. and Canada has more than doubled since May.

As to when the U.S. reach some degree of energy independence, the EIA’s January Short-Term Energy Outlook could hold some clues.

The EIA forecasts an increase in U.S. crude oil production from an average of 8.9 million barrels per day (b/d) in 2016 to an average of 9.3 million b/d in 2018, primarily thanks to U.S. tight oil production in Texas from the Permian and Eagle Ford regions.

Although overall U.S. oil production has been declining since mid-2015, the EIA has observed increasing production in the Permian region. In 2016, Permian production averaged 2.0 million b/d, a 5% increase from 2015. Permian production is projected to average 2.3 million b/d in 2017 and 2.5 million b/d in 2018.

Compared with the Permian region, other regions have fared poorly. The next most successful region, Eagle Ford, saw declines with average annual production at 1.6 million b/d in 2015 and 1.3 million b/d in 2016. The EIA expects production in that region will only begin increasing again in the third quarter of 2017 amid higher oil prices.

Clearly a 0.4 million b/d increase in domestic production isn’t enough to make up for the 2.7 million b/d in imports from OPEC nations, but it is decent progress for two years.

Still, U.S. tight oil is relatively costly to pull out of the ground with even the best U.S. shale plays producing at break-even costs near $35.

The problem with just pumping more oil to reach energy independence is that increasing supplies by a couple million barrels per day would drive down prices. And compared to OPEC nations that can break-even selling at prices below $25 a barrel, no shale driller could operate profitably under the prices declines that large a difference in supply and demand would cause.

U.S. shale drillers may be extremely important as marginal producers, but unless OPEC imports are banned entirely, U.S. tight oil output will inevitably decline like it did over the last two years. Even in that unlikely even, a shift away from OPEC would probably do more to benefit Canada and Mexico than the U.S. The two countries supply 40% and 8% of all U.S. imports of petroleum, respectively.

OPEC Deal Not Sufficient for Draining Inventories – 1/23/17

Comments from Saudi Energy Minister Khalid Al-Falih are raises concerns that OPEC’s biggest oil producer will abandon output cuts before prices make significant gains.

“We don’t think it’s necessary, given the level of compliance we have seen and given the expectations of demand,” Al-Falih said recently. “The re-balancing which started slowly in 2016 will have its full impact by the first half. Of course, there are many variables that can come into play between now and June, and at that time we will be able to reassess.”

OPEC’s decision to cut output reversed a two-year policy to maximize sales and protect market share from high cost shale drillers in the U.S — a strategy that had contributed to the worldwide glut of crude oil. The group, together with 11 other countries, came to an agreement on reducing supply by about 1.8 million barrels a day with cuts in effect from January to June.

Al-Falih said he was confident of the deal’s success and that OPEC will stop intervening in the market once global crude inventories return to their five-year average.

Yet, analysts from Bloomberg see the current agreement as a half-measure when it comes to clearing the global glut. According to their analysis, ending the deal by mid-year as planned and restoring production could mean a return to a building oil inventories. OPEC said draining bloated stockpiles was the main aim of the supply curbs.

If they extend the deal for six months beyond its scheduled expiry in June, that surplus will be entirely eliminated by the end of the year, according to Bloomberg calculations based on IEA data. If they don’t prolong the cuts and instead restore output to previous levels, about two-thirds of that glut will remain in place.

Oil prices rose 20% in the month after OPEC agreed to cut output. Since then, they’ve slipped almost 5% as traders, eyeing U.S. shale production, await proof that the deal will work. Many remember how Russia broke its pledge to cutback in 2008, while other members of group also failed to fully implement the agreement.

“OPEC is going to yet again over-promise and under-deliver,” said Eugen Weinberg, head of commodities research at Commerzbank AG, in a Bloomberg TV interview. “We are going to get cheating from OPEC; we’re going to get false information.”

Other analysts say OPEC has little choice but to go forward, given the economic damage the price rout has brought on the group’s members.

“The reward is so big that I believe they will be more respectful than they have been in the past,” said Paolo Scaroni, vice chairman of NM Rothschild & Sons Ltd. “They are so desperate that they will do whatever they can to do it — even sacrifices.”

The figures may not be useful, as exports will for some time still reflect production levels from before the agreement, said Ed Morse, head of commodities research at Citigroup Inc.

Based on the initial data, the committee will be able to report compliance of as much as 60%, said Morse. The best rate attained during its 2008 agreement was 70%, according to Hasan Qabazard, OPEC’s former head of research.

“They’re looking for 80% compliance,” said Morse. “50 to 60% compliance in the first few weeks is pretty good. If you just add up the Gulf countries and Russia today, that’s a very constructive contribution.”

EIA: Oil Outlook – 1/20/17

EIA full article on oil outlook.

The U.S. Energy Information Administration’s January Short-Term Energy Outlook (STEO) forecasts benchmark West Texas Intermediate (WTI) crude oil prices to average $52/b in 2017 and expect it to rise to $55/b in 2018.

Strong demand and the recent agreement among members of OPEC and some key non-member oil producers are putting upward pressure on crude oil prices. However, the EIA forecasts increases in global production should prevent significant price changes through 2018. Despite the recent OPEC agreement, EIA expects global petroleum and other liquid inventory builds to continue, but at a slowing rate, in 2017 and 2018.

Market reactions to the November OPEC agreement contributed to rising oil prices in December despite increasing global oil inventories and U.S. oil rig productivity.

Crude oil spot prices are expected to remain fairly flat over 2017 in part as a result of the responsiveness of U.S. tight oil production. The EIA forecasts oil prices will slowly increase in 2018 as inventory builds slow. This rise in oil prices encourages production increases, particularly in the Lower 48 onshore. However, any production increases realized while the global markets are building inventories will moderate price increases, which will in turn limit additional production increases.

Total U.S. crude oil production is estimated to have averaged 8.9 million b/d in 2016, down 0.5 million b/d from 2015, with all of the decline in the Lower 48 onshore. The EIA forecasts U.S. crude oil production will increase to an average of 9.0 million b/d in 2017 and 9.3 million b/d in 2018 on higher activity, drilling efficiency, and well-level productivity.

In its previous outlook, the EIA expected Lower 48 onshore production to decline through the end of 2017. However, the new forecast reflects crude oil prices near or above $50/b, which have led to increased investment by some U.S. production companies, particularly in the Permian Basin. EIA expects that declines in Lower 48 production have largely ended and forecasts relatively flat production in the first quarter of 2017 at 6.7 million b/d, which will then increase to an annual average of 7.0 million b/d in 2018. Even modest increases in crude oil prices could contribute to supply growth in other U.S. tight oil regions.

EIA estimates global petroleum and other liquids production will increase through the forecast. Annual estimated and forecast production levels for 2016, 2017, and 2018 were revised up to 96.4 million b/d, 97.5 million b/d, and 98.9 million b/d, respectively. More information about crude oil prices and production is available in EIA’s latest This Week in Petroleum.

Comments from Davos Paint Bleak Picture for Oil Price Hopes – 1/19/17

Among oil industry experts and officials in Davos, Switzerland, pervasive skepticism about the effectiveness of the OPEC deal in rising oil prices. At the front of everyone’s mind: the rising output from U.S. shale oil rigs.

Oil-price gains will trigger a “significant” increase in U.S. shale output as OPEC and other producers rein in supply, according to the head of the International Energy Agency (IEA).

At $56 to $57 a barrel, “a lot of shale plays in the United States would make perfect sense to produce” Executive Director Fatih Birol said in a Bloomberg TV interview in Davos. “I expect U.S. production will start to increase again… as a result of the higher prices,” Birol said. “Prices will go up, U.S. and other production will go up and put downward pressure on prices again. And up and down. We are entering a period of greater oil-price volatility.”

Birol’s comments suggest that the IEA has become more optimistic about the outlook for U.S. production. Previously, the agency said it expected U.S. tight oil — as shale is also known — to rise only “marginally” in 2017.

Oil prices have risen about 20% since the Organization of Petroleum Exporting Countries (OPEC) reached a deal to curtail supply last year. The November agreement prompted a surge in activity in the U.S..

While oil prices have increased more than 20% since OPEC decided to cut production to boost prices, it has also helped bring back more shale drillers who caused prices to drop in the first place due to oversupply in the market.

“This means that while 2017 is starting out very bullish for oil, it may not end that way,” said Bjarne Schieldrop, chief commodities analyst at SEB AB bank. “Physical delivery of oil will force the price back down again in the second half of this year.”

Production in the U.S. has increased by about 460,000 barrels a day, or 5.4%, in the past six months. In response, the EIA recently raised its domestic output forecast for 2017 to 9 million barrels a day from 8.78 million projected in December. Output is projected to increase to 9.3 million barrels a day for 2018.

“The U.S. oil producers, and Canadian producers and all over the world are adapting to doing better in a lower price environment and that has created a resiliency that we haven’t seen,” Kenneth Hersh, chairman of NGP Energy Capital Management, said in Davos. “U.S. unconventional has increased about half a million barrels on a $50 base, whereas two years ago it was unthinkable oil production in the U.S. would increase at $50.”

The consistent belief that U.S. shale will keep prices low is bad news for OPEC members and non-members who agreed to cut production to re-balance markets, likely at the expense of their own market share.

U.S. Shale Oil Drilling Revival On the Way – 1/18/17

The Energy Information Administration (EIA) reports that shale oil production is rising strongly in the U.S. and many analysts are forecasting a year of revival for shale.

Project approvals are to more than double this year and exploration spending is set to increase for the first time in three years, according to Wood Mackenzie Ltd. 20 oil and gas fields are planned for development in 2017 compared with 9 in 2016, the industry consultant said in a report, while spending on exploration and developing existing projects will increase by 3% following two years of cuts.

Beyond 2017, there are still many projects that have break-even costs higher than $60 a barrel, especially offshore. Of the 40 larger deepwater projects up for approval, about half have a rate of return less than 15% at a $60 oil price, according to Wood Mackenzie. This relatively low return for costly, difficult projects could be problematic if prices remain below $60 as expected.

Spending is picking up fastest in onshore U.S. operations, unsurprisingly, where companies can respond quickly to higher oil prices thanks to speed of fracking operations and abundance of drilled but untapped wells. Spending on U.S. onshore projects is likely to grow 23% to $61 billion, based on the Wood Mackenzie report. In much of the world outside the U.S. exploration spending is expected to continue to decrease.

While the outlook is improving, global upstream spending in 2017 will remain 40% below 2014, Wood Mackenzie said. Project approvals will also be below the 2007-2014 average of 40 a year.

So what does that mean for the OPEC push for higher oil prices?

How effective the OPEC supply cuts can be if U.S. output rises was always a major concern for OPEC officials. So far, Saudi Arabia’s oil minister, Khalid al-Falih, has voiced skepticism of shale’s potential impact. Speaking at Davos, he observed that oil-field-service providers are renegotiating terms with drillers and are likely to raise the break even price for shale production.

Still, slightly higher costs have already been priced in as far as many traders are concerned. And the EIA forecasts that prices for West Texas Intermediate will average $52.50 a barrel in 2017 with output increasing throughout the year. In just the last three months, U.S. petroleum-liquids production bounced by about 350,000 barrels a day (b/d) — more than the output cut promised by Russia as part of its deal with OPEC. At $52.50, the EIA sees U.S. output rising by another 775,000 b/d by the end of 2017.

Realistically, a revival for shale drilling in the U.S. is inevitable, but just how badly it tears apart the OPEC deal will be an interesting show.

Oil in 2017: Will the OPEC Deal Work? – 1/10/17

The promise of production cuts from OPEC and its partners gave oil prices a boost in 2016. Now the traders who bought in are waiting to see results.

Unlike in the U.S., where output is published weekly, members of OPEC can take months to release production numbers. Even then, their data can contradict independent surveys as most of the group’s members tend to cheat on their deals. Now all the waiting is putting at risk the little optimism left in the market as stories of rising rig counts in the U.S. pile up. Many analysts were skeptical about commitment to the deal from the start.

Still, 2017 could see a lack of any serious gains or losses.

Market prices already reflect OPEC cuts, and it is unlikely that 2017 will see any more major supply cuts unless Venezuela, the most unstable OPEC member, sees its production vanish all at once instead of in a gradual decline as expected. In fact, because OPEC plans to operate below capacity, there will be plenty of capacity to bring online should something unexpected happens.

On top of the flex capacity, bloated oil inventories remain large enough of a price dampener that reducing them is a major goal of OPEC’s intervention according to the group.

The IEA estimates that OPEC’s cuts could start to deplete inventories as early as the first quarter of 2017, while OPEC itself says that at best the deal will speed up the re-balancing of the global oil market, only resulting in demand exceeding supply in the second half of the year.

According to a Bloomberg survey, analysts are expecting crude prices to average $58 per barrel in the fourth quarter of 2017 with forecasts reportedly closer than usual.

Shale Oil in 2017: A Reflex Test – 1/5/17

After pulling off its biggest deal in a decade, OPEC faces a new balancing act in 2017: boosting prices without jump starting the U.S. shale patch.

The shale boom created a global supply glut that sent oil prices plummeting in mid-2014, a trend only amplified by a OPEC strategy favoring market share preservation over price controls. During the rout, oil prices fell from more than $100 a barrel to as low as $26, straining the budgets of companies and countries to the breaking point.

With the new cuts, prices could average $58 a barrel in 2017, according analyst estimates compiled by Bloomberg. While that gain will aid OPEC members in desperate need of revenue, it could also spur a revival in U.S. drilling.

Everyone is watching to see how quickly U.S. shale will rebound. Estimates vary on possible additions this year, ranging from 500,000 b/d to 1 million b/d, but everyone agrees that U.S. shale will add production in 2017.

U.S. drillers who survived the rout by becoming leaner and more efficient are a constant threat to the efficacy of the OPEC deal. At 8.8 million barrels a day, the U.S. is already pumping near 2014 levels, using only a third of the rigs, according to data from Baker Hughes Inc. and the U.S. EIA. And, even now, there are signs that U.S. shale is ready for comeback despite prices stabilizing at around $50 a barrel. Since May, about 200 rigs have been added in U.S. shale patches with more expected.

Should prices pass $60, it could mean a million-barrel shale surge from the U.S., Macquarie Research analysts Vikas Dwivedi and Walt Chancellor noted in a Dec. 12 report. A Citigroup Inc. analysis also projects that if oil passes $70 a barrel, the U.S. could start pumping out an extra million barrels a day. Either case would completely overwhelm the OPEC cuts.

The issue for the oil industry now isn’t whether U.S. drillers will expand their operations, but rather “how quickly does shale come on to tap those higher prices, and then how quickly they push them back down,” said Peter Pulikkan, a Bloomberg Intelligence analyst in New York. “2017 is the year where you are going to see shale’s reflexes tested.” I couldn’t agree more.

U.S. Shale Tempers OPEC Deal Optimism – 12/28/16

After a period of low oil prices devastated its member nations, OPEC will start cutting collective oil output to 32.5 million b/d in January. With 11 non-OPEC producers reducing their own output by an additional 558,000 b/d, one might predict prices to rise fast and high. However, the threat of a revival in shale oil output from the U.S. is keeping a lid on expectations.

The main proponent of the group’s original pump-at-will policy that led to the glut, Saudi Arabia is now facing massive revenue shortfalls. The deal to cut global supply – if involved producers follow through on their promises – would probably give the largest OPEC producer a chance to catch its breath.

Saudi officials have justified their previous strategy using the decline in U.S. shale output, a major win in their fight to maintain market share. Yet, they may soon be faced with the harsh reality that shale is going anywhere. In its Short-Term Energy Outlook for December 2016, the EIA said that “oil production, particularly in the United States, has been more resilient in the current oil price environment than had been expected, as reflected in improving financial conditions at oil companies”.

And now that OPEC is expected to finally push for higher oil prices, the shale patch is benefit as much, if not more so, than OPEC members.

Oil rig counts from the U.S. have been steadily rising since the OPEC deal was announced. In 2016, the Permian basin play has seen acreage prices balloon despite crude oil prices remaining close to 50% of what they were 2014.

In late 2016, companies paid higher than $40,000 an acre for drilling leases, roughly eight times what similar leases sold for in 2014.

Still, there are some variables that could shock markets which are worth noting: Will OPEC stick to promised cuts? (probably not) Will those cuts rebalance the market at some point next year? (most would say yes) How fast will U.S. shale rebound when prices do go up? (almost certainly before the end of 2017)

The promise of production cuts has so far barely moved prices from the $50 per barrel mark, largely because the specter of shale production is keeping expectations in check. Oil price predictions coming from major analyst groups are generally in the $50-$60 range for 2017 and, no matter what spin people try to put on it, those are not good numbers for OPEC.

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