OPEC Agrees to Cut Production

OPEC Agrees to Cut Production

2nd December 2016

The onshore rig count increased 5 this week, bringing the total to 570 compared with 714 a year ago (down 20%), but up over 50% since the low in late May 2016. Rigs targeting oil increased 3, standing at 474, up 49 % (158) since May.

OPEC sent crude oil prices soaring by agreeing to its first production cuts in eight years. The deal, designed to drain global oil inventories, overcame disagreements between the group’s three largest producers -- Saudi Arabia, Iran and Iraq -- and ended two years of attempting to use the free markets to curtail production and balance demand.

The OPEC plan is now to reduce output by about 1.2 million barrels a day by January, cutting its production to 32.5 million barrels. The agreement exempted Nigeria and Libya, but gave Iraq its first quotas since the 1990s. It was also broader than many had expected, extending beyond OPEC, with Russia indicating it has agreed to cut its output by 300,000 barrels a day.

Saudi Arabia, which raised oil production to a record this year, will reduce output by 486,000 barrels a day to 10.058 million a day, an OPEC document shows. Iraq, OPEC’s second-largest producer, agreed to cut by 210,000 barrels a day from October levels while Kuwait, Qatar and the United Arab Emirates (U.A.E.) agreed cuts of 300,000 barrels a day. Iran agreed to freeze its production at ~3.8 million barrels a day, close to its current rate.

That is the plan. The strength of the deal will in reality depend on whether all parties deliver on their commitment. Saudi Arabia and its Gulf allies, the U.A.E. and Kuwait, have traditionally stuck to their cuts, but some others haven’t, particularly when prices are low. Any signs of backsliding and the market are likely to once again see prices come under pressure. 

There is an irony though.  Any pricing strength is likely to translate into increased activity, particularly those in the United States with shale producers in particular being poised to benefit.  It then becomes a race to see how quickly any cuts get replaced, slowing and reversing the impact. 

Additionally, if the market structure does shift more toward backwardation, where oil for future delivery is cheaper than near-dated oil, it's likely that some of the millions of barrels currently in storage will make their way into the market rapidly.

Furthermore, if prices do sustain the current rally, it's also likely that China, and to a lesser extent India, will ease off buying oil for strategic storage, thereby weakening demand growth in Asia's top two importing nations.

What OPEC may well end up achieving is a price floor for crude oil, along with reminding the market that it still exists as a relevant force.

In view of the OPEC developments, we will start our more extensive gas coverage next week, with an overview of some of the material developments that will impact on gas and LNG in 2017.

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 570.  When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 70% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 293 (down 3 last week), with Eagle Ford flat, Permian and Williston each down 1.

Total U.S. rig count (including the Gulf of Mexico) stands at 593, up 5 last week, with rigs targeting oil up 3. The horizontal rig count increased to 475, up 5 last week.

Oil Price

Brent, the global benchmark for oil, was up $5.83 to US$54.14 a barrel, reflecting a gain of 12.07% on the week.

WTI crude rose $4.26 to US$51.38 a barrel, up 9.04% on the week.

U.S. Supply and Demand

Sources: EIA Weekly Update and GCA analysis

U.S. crude oil refinery inputs averaged 16.3 million barrels per day, with refineries at 89.8% of their operating capacity last week. This is 114,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.2 million, down 0.1% from a year ago. Total commercial petroleum inventories increased by 0.5 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 9,000 barrels to 8.690 million barrels a day. The Lower 48 crude production now stands at 8.177 million barrels per day, down 2,000 barrels a day.

U.S. crude imports averaged about 7.5 million barrels per day last week, a decrease of 30,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, ~5.3% above the same four-week period last year.

Crude oil inventories decreased 0.9 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 2.4 million barrels; total storage is 61.5 million barrels (~68% utilization).

Authors

OPEC Agrees to Cut Production

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
OPEC Agrees to Cut Production

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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