The OPEC Report, A History Lesson, And A Geopolitical Reality Check

Ok, so OPEC is out with their monthly and some folks are surprised.

But that figures because a lot of folks are always surprised or at least they pretend to be because if they’re not surprised, then they can’t write headlines that are designed to make you surprised and thereby get you to click.

Here are the headlines via Bloomberg:

  • OPEC Raises 2017 Estimate for Supply Growth From Rivals By 64%
  • OPEC raises estimate for non-OPEC supply growth in 2017 to 950k b/d y/y, which is 370k more than previous month’s est., amid recovery in U.S. output, OPEC says in monthly report
  • Non-OPEC growth outlook now 4 times higher than when OPEC announced cuts in November
  • Raises 2017 U.S. supply growth outlook by 282k b/d, to 820k b/d y/y
  • OECD Inventories still 276m bbl above five-year avg
  • OPEC-13 crude output -18.2k b/d m/m in April to 31.732m b/d, as 7 out of 13 members reduced output: OPEC secondary sources data
  • Biggest m/m changes: Angola +97k b/d; UAE, Libya -62k each
  • Saudi +49.2k b/d m/m to 9.954m b/d: OPEC secondary sources
  • Saudi +46.4k b/d to 9.946m b/d: Saudi direct comms to OPEC

Note the bolded bits.

Here’s an excerpt from the report:

US oil and gas companies have already stepped up activities in 2017 as they start to increase their spending amid a recovery in oil prices. As a result, US crude oil production surpassed 9 mb/d in February 2017, about 0.5 mb/d higher than the low seen in September 2016. For 2017, total US liquids production is forecast to increase by 0.82 mb/d with crude oil contributing 0.6 mb/d. In the first two months of this year, tight crude output increased by 0.10 mb/d from December 2016, while NGLs output rose by 0.26 mb/d over the same period. With the pick-up seen in drilling activities, as well as increased cash flows, US tight crude output is expected to rise rapidly and increase by 0.6 mb/d in 2017.

A large part of the excess supply overhang contained in floating storage has been reduced and the improvement in the world economy should help support oil demand. However, continued rebalancing in the oil market by year-end will require the collective efforts of all oil producers to increase market stability, not only for the benefit of the individual countries, but also for the general prosperity of the world economy.

And here’s a fun table for the visual learners:

OPEC

*********

Now look, does anyone really believe OPEC didn’t see this coming?

The reporting I’ve seen on this Thursday morning seems to suggest that everyone is sticking with this ridiculous idea that the cartel which for years controlled oil prices somehow doesn’t understand how oil prices work. Like they cut production and then looked up a couple of months later and said something along the lines of: “Wait! What the fuck is this about?! We drove prices up and now US production is coming back online?!

Look at this silly shit from CNNMoney (that bastion of credible market reporting):

CNNM

Give me a break.

Of course OPEC knew rival supply was going to rise after the cuts, and if you think it’s a coincidence that they “just happened” to raise their estimates for rival supply growth by 64% less than two weeks before a meeting at which they’ll be looking for an excuse to extend the production cuts, then you’re fucking dense.

They’re just trying to figure out how to jerry-rig this thing to get prices into a kind of “sweet spot” where things aren’t bad enough to plunge GCC economies into the doldrums but not good enough to trigger a shale bonanza. 

It takes some time to figure out exactly the right mix of cuts and jawboning to get to that sweet spot. That’s all you’re seeing. 

This idea that OPEC is clueless and running around with their hair on fire is absurd. And Saudi Deputy Crown Prince Mohammed bin Salman told markets as much earlier this month.

The ultimate absurdity in all of the reporting I’ve seen on this is that it apparently hasn’t occurred to anyone that the very fact that they’re reporting on OPEC cuts and meetings is itself evidence that the cartel still controls prices. Otherwise, why the fuck would anyone still be talking about it? Good question, right?

Well anyway, BofAML threw in the towel on Wednesday. And although they’re still long-term constructive, they’re adjusting to what they call “the crude reality” (because no one has ever thought of that cute title before). To wit:

Spot and forward oil prices have fallen simultaneously. The sharp drop in Brent prices last week does not signal an end to an oil price recovery or an OPEC failure to rebalance the global oil market, in our view. Rather, spot and forward Brent crude oil prices have fallen simultaneously, suggesting an oil price “level realignment” and not a cyclical downturn. Investors have become concerned about the pace and breadth of the recovery in the US rig count and about the pace of US inventory draws, encouraging large scale liquidation of spec long positions in WTI and Brent. Still, most US producers remain underhedged in 2018 and US rig count increases should slow.

OilStocks

We bring down our Brent forecast to $54/bbl for 2017.With OPEC cuts working at a slower pace than we expected, we are adjusting our inventory projections and our 2018 global oil balances. Our revised supply and demand numbers now show a balanced market next year, from a 450 thousand b/d deficit prior, but we still expect an average deficit of 610 thousand b/d in 2017. More importantly, we bring down our forecasts to reflect the crude reality: stocks are still too high and US supply is set to recover faster than we anticipated. We now see Brent averaging $54/bbl in 2017 and $56/bbl in 2018 compared to $61 and $65 prior, but we note that our projections remain $5/bbl on average above the current forward. For WTI, we now project $52/bbl and $53/bbl, compared to $59 and $63 prior.

BofAMLUSStocks

Meanwhile, Citi is out with a labored attempt to find and reverse engineer some historical precedent.

Here’s what the bank had to say earlier this week:

The last major joint OPEC/non-OPEC agreement on a coordinated production cut—in March 1998—eventually led to an inventory drawdown which took some time to materialize, but saw a 300-m bbl decline by early 2000. History looks teed up to repeat itself. As the market rebalanced in 1999, oil prices which had fallen from ~$25 per barrel by early 1997, to $15 by early 1998, and then $10 in early 1999, rallied to over $30 by 2H 2000. Then, as now, there was concern over a sizeable inventory overhang, and doubts about deal compliance. (See Figures 1-6.)

CitiOilCharts

The setup for the 1997-98 oil price crash was (1) collapsing oil demand due to Asian economic recession, exacerbated by a mild winter in North America/Europe, and (2) fear of frenetic growth in OPEC supply—an echo of shale today—from Nigeria, Venezuela, Iran, Iraq, and Libya (ironically today’s “Fragile Five”), expected to add ~8-m b/d over the coming decade, and OPEC then, as they did recently, raised production in an untimely manner. In early 1997, Saudi Arabia hiked output by 0.8-m b/d in confrontation with Venezuela on access to the US market, inventories started their relentless build, and the November 1997 OPEC meeting basically eliminated quotas just as demand slid and inventories built further.

In the end, the production agreement worked—300-m bbls were taken out of the market over 18 months, and oil prices recovered. At first, markets didn’t believe the cuts were credible, and that demand might not recover quickly. But OPEC cut ~1-m b/d over six months, matched by non-OPEC countries, driven by Mexico and Norway. Oil demand came back after languishing in 1998-99.

Dude, whatever.

I mean that’s all fine and good, but people are making this far more complicated than it is. As noted above, OPEC will finagle this until they get exactly the price they want.

You might think US production is in the driver’s seat here but it’s not. It’s just responding to price moves that are initially engineered by the cartel. The cartel does something to change the market dynamic, US production controls the range-bound price action for an interim period, then OPEC takes a look at how shit’s working out and does something else to push things in whatever direction they think things need to go.

That’s just all there is to this.

And the only thing that’s going to change that dynamic is some kind of geopolitical catastrophe that sees the Sunni/Shiite proxy wars in Yemen, Syria, and Iraq morph into a nightmarish head-to-head fight between Riyadh and Tehran (remember Nimr al-Nimr? yeah, something like that) or else some material deterioration in Russia/Saudi relations.

End of story.

 

 

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