Bakken Update: OPEC, Nigeria, And Libya Are All Good Reasons For A November Oil Price Drop
After several weeks of crude drawdowns in US inventories, the oil market seems to be heading in the right direction. The EIA continues to report better numbers, reflecting a change in the world oil markets. This has been reinforced by and OPEC agreement that may have placed a floor in oil prices for the short term. All of this bullish news still has WTI trading sub-$50/bbl. There are several reasons for this, and those reasons will push prices higher or lower. The current trading range is probably $53 to $45/bbl, and we would guess this will continue. OPEC’s decision for this “understanding” is based out of fear. This fear is oil trading lower and testing the 52-week lows. Although this wasn’t a probable situation, it was possible. The possibility is one the Saudis and rest of OPEC could not chance.
The world currently produces approximately 450K to 500K bpd of oil more than it uses. This is much better than estimates of over 2 million bpd earlier this year. The supply glut is not going away, and this one has been especially painful. OPEC hasn’t cut during a supply glut since the 80s. The reason is it generally does not work. Demand gluts are easier, as supply will shut down as crude customers disappear. No demand for refined products means refiners will not buy feedstock. When refiners quit buying, producers decrease. This tends to even supply/demand quicker. Supply gluts generally cause lower prices, but the difference is refiners continue to buy. Crack margins have held up well and as long as a refiner can make money, it will buy crude. Lower prices motivate oil producers to drill more. Revenues lost to price decreases are made up with volumes. So it creates a difficult cycle to get out of, without an agreement to produce less than is being used. This occurred with OPEC, and looks to stabilize a market that has little positive going for it.
The OPEC “understanding” will provide a cut from current production of 33.3M bpd to a range of 32.5M-33M bpd. The majority of this will be shouldered by the Saudis, will possible help from members like Kuwait. OPEC is also seeking help from non-OPEC members like Russia, but little positive feedback has been garnered. There are two wildcards that could provide major issues for the oil markets. Libya and Nigeria have seen production dwindle to a significant extent. This is related to war, which could allow both countries to increase production at anytime. Libya’s civil war is more difficult. We continue to see fighting as the country is completely destabilized. Nigeria continues to see terrorist work to decrease oil production. The Avengers have been very disruptive to oil infrastructure, and will probably continue to do so. In early September, Libya’s National Oil Corporation said it would double production within four weeks after it was handed control of crucial ports that had been seized by forces loyal to the country’s rival administration. Libyan production can be increased relatively quickly, as most of the wells were shut in. This was due to port closings.
This chart provides an idea of how much production has decreased from Libya and Nigeria since 2014. It also shows a 22.4% increase from Iran. It stands at over 3.6M bpd, and plans to increase to 4M bpd. Expectations are that Venezuelan production will continue lower as economic issues in that country may not be fixable.
Although OPEC does not have the control over oil prices it once had, we see oil supplies move with OPEC production. It still control a third of world supply, and a move to limit production would be a positive, if members can stick to quotas.
The Saudis are making a big move here, but there is little by the way of trust in these actions. History shows that OPEC members will lie and keep production up while other members stick to quotas. During the 80s supply glut, the Saudis saw how OPEC members will act in times of low oil prices. In response to a major decrease in demand from the US, OPEC made a major cut. Saudi Arabia shouldered the burden of the largest decrease. It stuck to production numbers while other members continued to pump. Oil prices continued lower and other members stole Saudi customers. After this occurred, Saudi Arabia had one of the worst recessions in recent history. It vowed not to be the swing producer based on the actions of OPEC. Now the Saudis have a new oil minister, and seem to be ok with repeating the past. No one believes that OPEC will stick to the numbers imposed, and because of this oil prices have not yet seen $50/bbl. Although we believe there is a new floor to pricing, there may not be a lot of upside in the short term. Most are waiting to hear how a production ceiling will be governed as OPEC has proved to be dishonest. Saudi Arabia has no problem with decreasing production, as it is a seasonal occurrence. It decreases 400K bpd this time of year, as it uses less fuel oil to cool buildings. It is possible this ceiling won’t take any export barrels off the market. November could be interesting if Libyan and Nigerian oil production increases. If this is seen in concert with no deal out of OPEC, we could retest 52-week lows. There is still a tremendous overhang of oil on the market, and it will take time to work through inventories. Currently the best approach would be conservative, as it will be a volatile market until November.
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