oil oil, opec OPEC

A Graphical History Of Oil Prices

“Traders are getting antsy and think this is a global oversupply pushing barrels into the U.S.,” Michael Loewen, commodities strategist at Scotiabank in Toronto, told Bloomberg by phone on Wednesday after US crude stocks unexpectedly rose 2.26m bbl versus consensus of a 2.5m bbl draw.

WTI fell, breaking a three-day winning streak:


Here’s the full breakdown via Bloomberg:

  • Nationwide crude stockpiles rose 2.26m bbl, driven by 1.3m bbl increase in physically disconnected PADD 5 region and 1m bbl rise in PADD 2 to highest level since late May
    • Decline compares with 4.15m bbl draw reported by API yesterday and 2.5m bbl draw forecast in Bloomberg survey
    • Inventories declined in PADD 3 for 6th time in 7 weeks, to lowest level since Oct.
    • READ: Companies move inventory away from Gulf coast region in order to reduce year-end tax liability
    • PADD 4 also fell, while stocks at Cushing declined for 1st time in 4 weeks
  • Nationwide crude imports rose 1.1m b/d to 8.47m, highest since end-October
    • Imports rose in all regions, with biggest increase in PADD 1
  • Domestic crude production fell 10k b/d to 8.786m, Lower 48 states little changed at 8.271m b/d; both slipped from highest since May
  • Crude input to refineries rose 184k b/d to 16.658m, increasing for 3rd week and highest since mid-September; utilization gained 1 ppt to 91.5%, also highest since mid- September
  • PADD 3 refinery runs highest on record

As regular readers are no doubt aware, I’m steadfast and resolute in my contention that geopolitics is pretty much all that matters when it comes to crude. The OPEC/non-OPEC production cut deal relies on cooperation and good faith between countries that are fighting on opposite sides of multiple proxy wars across the Mid-East.

There are sectarian tensions at play which I’ve outlined in great detail on too many occasions to count, and I was pleased to see Reuters taking up the discussion this week. Consider the following:

“Where are you, Oh Arabs, Oh Muslims, while we are being slaughtered?”

An old man’s cry, in a video posted online from Aleppo’s ruins, poses an uncomfortable question for the mainly Sunni Muslim Arab states backing rebels fighting President Bashar al-Assad and his allies Iran and Russia.

For Saudi Arabia, locked in a regional struggle with Iran, Assad’s capture of the rebel haven reflects a dangerous tilt in the Middle East balance of power toward Tehran.

Dismayed by this boost to Iranian ambitions for a “Shi’ite crescent” of influence from Afghanistan to the Mediterranean, Riyadh is determined to reverse Tehran’s gains sooner or later.

Countering Iran, buoyed by its 2015 nuclear deal with world powers, remains central to Gulf Arab policy but it is not clear how this might be achieved, especially when other concerns are multiplying.

Beset by low oil prices, at war in Yemen, and ties with Egypt strained, Riyadh and Gulf allies are questioning how much armed help they should now give the rebels.

Right. And these are the very same rebels that are being vaporized by the Russian air force. And that would be the very same Russia that’s set to participate in the production cuts.

In any event, I ran across a great graphical history of oil prices from Goldman today that’s worth a look. I’ve presented it below along with a truncated version of the bank’s 2017 outlook. Enjoy, but don’t forget: at the end of the day it’s all about geopolitics…

Brent crude oil prices peaking at $59.00/bbl in 1H17 as cuts are implemented, pushing the market into deficit in 1Q17, which should shift the market into backwardation by the summer. Given that the expected backwardation should boost commodity index returns, we have shifted to an overweight commodities allocation for 3 and 12 months.

  • Key: OPEC compliance to cuts and whether non-OPEC delivers on its contribution. We expect 84% compliance to the 1.6 mb/d country level announced cuts (which are lower than the 1.8 mb/d headline cuts) from October 2016 IEA crude production levels given that compliance to cuts outside of Gulf Cooperation Council (GCC) producers (Saudi, Kuwait, UAE, Qatar, Bahrain and Oman) has historically been poor. We expect Russia will freeze production at current levels. Greater-than-expected compliance to the announced cuts, or more Saudi cuts than announced, pose upside risk to our forecast (full compliance = $6/bbl upside to our forecast).

Limited oil price upside beyond the high-$50/bbl range, as prices in this range lead to increased production from US shale and other lower-cost producers, and as legacy projects continue to ramp up.

  • Key: Shale production growth in 2017. We expect US shale production to decline by 80 kb/d in 2017 (but increase 100 kb/d if we assume the well backlog is gradually tapped). Should greater compliance to OPEC/non-OPEC result in the upside to oil prices described above, the higher prices would likely bring on more shale, presenting upside risk to our production forecast, which could offset the cuts. In short, the New Oil Order lives.

A continuation of lower correlation between oil prices, the US dollar and risky assets. The breakdown of the dollar/oil correlation will remain important in breaking the vicious cycle between a stronger dollar, weaker commodity prices and pressure on EM.


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