Co­or­di­nated in­ter­ven­tion to boost oil prices

KAMCO OIL MAR­KET MONTHLY RE­PORT

Kuwait Times - - BUSINESS -

Af­ter months of spec­u­la­tions and a num­ber of failed at­tempts, OPEC mem­bers fi­nally agreed on a pro­duc­tion cut, al­beit marginally, in Al­ge­ria in an in­for­mal meet­ing. In fact, the ef­forts ap­pear much ag­gres­sive this time as OPEC mem­bers had a fol­low-up meet­ing with some non-OPEC pro­duc­ers, most no­tably Rus­sia, in Is­tan­bul on Wed­nes­day to work out a strat­egy to re­bal­ance the oil mar­ket. The out­come of this meet­ing was also sig­nif­i­cant and the OPEC Sec­re­tary Gen­eral said the meet­ing was con­struc­tive and they have firm com­mit­ments from Rus­sia that it is will­ing to par­tic­i­pate in a co­or­di­nated ef­fort to limit oil out­put. In ad­di­tion, more meet­ings are ex­pected in the com­ing weeks as the par­tic­i­pa­tion of non-OPEC pro­duc­ers would be cru­cial for the strat­egy to work.

Oil price re­acted strongly to the afore­men­tioned de­vel­op­ments, al­though the in­di­vid­ual out­put tar­gets for each coun­try is ex­pected to be de­cided in the next of­fi­cial OPEC Com­mit­tee Meet­ing in late Novem­ber-16. OPEC crude reached a 15-month high level of $48.81/b on 11-Oct-16, whereas Brent broke the $50/b ceil­ing. Nev­er­the­less, in order to calm the en­thu­si­asm in the mar­ket, the oil min­is­ter of Saudi Ara­bia, while ex­press­ing op­ti­mism in the ex­pected agree­ment in Novem­ber, as­serted that the group should not cut the pro­duc­tion too tightly so as to shock the mar­ket. He added that oil prices could rise 20 per­cent this year to reach $60/b by year.

Sur­pris­ingly, there was no word on shale pro­duc­ers’ re­ac­tion to the ex­pected rise in oil prices af­ter the pro­duc­tion cuts are fi­nal­ized. In ad­di­tion, the IEA said that oil de­mand has fallen to four year low dur­ing Q3-16 on the back of a de­cline in global growth, par­tic­u­larly OECD coun­tries as well as in China. The agency did not change its de­mand ex­pec­ta­tions for 2016 and 2017 but said that the mar­ket would move faster to­wards bal­anc­ing if OPEC sticks to its tar­get. The agency also said that colder weather con­di­tions dur­ing the fi­nal quar­ter of 2016 could see some rebound in growth.

Monthly crude out­put rate by OPEC mem­bers con­tin­ued to rise dur­ing Septem­ber-16. Ac­cord­ing to Bloomberg, the group pro­duced at the rate of 33.8 mb/d dur­ing the month, an in­crease of 170 tb/d as com­pared to the pre­vi­ous month. The in­crease was pri­mar­ily on the back of higher pro­duc­tion in Nige­ria and Libya as both the coun­tries emerged from months of dis­rup­tion in crude pro­duc­tion. Iraq also con­tin­ued to pump at the rate of 4.5 mb/d (+60 tb/d) but the in­crease was off­set by de­cline in pro­duc­tion by Saudi Ara­bia (-60 tb/d).

Av­er­age OPEC monthly oil price de­clined marginally dur­ing Septem­ber-16 to reach $42.9/b as de­clines dur­ing the first three weeks of the month was off­set by con­tin­u­ous rise in prices dur­ing the last week of the month. Av­er­age price this month wit­nessed strong growth of 11.5 per­cent to reach $47.8/b.

Oil Prices

Oil pro­duc­ers are ex­pect­ing to see a sig­nif­i­cant im­pact on oil prices af­ter the pre­lim­i­nary ac­cord to cut oil out­put achieved last month in Al­ge­ria was rig­or­ously fol­lowed-up at an­other meet­ing of a smaller group on Wed­nes­day in Is­tan­bul. The ini­tial pro­posed pro­duc­tion cut was mar­ginal at 0.7 mb/d for the OPEC; how­ever, the fact that other non-OPEC pro­duc­ers could join the pro­duc­tion was a key mile­stone of the present talks. With Rus­sia join­ing the co­or­di­nated ef­fort, the quan­tum of cuts would de­ter­mine the fu­ture course of the oil mar­ket. It is also be­lieved that Nige­ria, Libya, and Iran would ini­tially be ex­empt from the ac­cord. There are wor­ries that the im­pact of the ac­cord would not be as planned if the three ex­empt coun­try scale up their out­put sig­nif­i­cantly over a short pe­riod of time. In ad­di­tion, there were lack of con­sen­sus within the OPEC con­cern­ing the ex­act out­put by Venezuela and Iraq, with the dif­fer­ence cur­rently pegged at around 0.5 mb/d. Also, all eyes are on Saudi Ara­bia on how much the coun­try would be will­ing to take as its share of cuts. It is also not clear that whether the pro­duc­tion cuts would be made si­mul­ta­ne­ously with non-OPEC play­ers or who would be the first to a un­der­take these ac­tions. An­other worry was the re­cent ex­port fig­ures from China with a re­ported de­cline of 10 per­cent dur­ing Septem­ber in­di­cat­ing a deeper slow­down in the coun­try that could af­fect fu­ture oil de­mand num­bers, al­though the coun­try’s crude im­ports reached record lev­els dur­ing Septem­ber-16 af­ter a new stor­age fa­cil­ity be­came op­er­a­tional. More­over, as the prob­a­bil­ity of US in­creas­ing in­ter­est rates has seen a steady in­crease, its im­pact on oil de­mand is ex­pected to be more on the down­side. On the pos­i­tive side, al­though IEA warned of a de­mand slow­down, the agency re­ported that global oil stock­piles de­clined for the first time in 7 months dur­ing Septem­ber-16, pri­mar­ily in OECD coun­tries on the back of higher-thanex­pected sea­sonal de­clines in the US and Ja­pan.

Av­er­age OPEC monthly oil price de­clined marginally dur­ing Septem­ber-16 to reach $42.9/b as de­clines dur­ing the first three weeks of the month was off­set by con­sis­tent rise in prices dur­ing the last week of the month. The de­cline in Kuwait crude was slightly higher at 1.6 per­cent, whereas Brent gained 1.8 per­cent dur­ing Sep-16. Av­er­age OPEC crude this month wit­nessed strong growth of 11.5 per­cent to reach $47.8/b.

World oil de­mand

To­tal world oil de­mand growth for 2016 was in­creased marginally once again this month by 10 tb/d month-on-month to 1.24 mb/d re­flect­ing up­ward re­vi­sions in OECD Europe, Asia Pa­cific and Other Asia that more than off­set down­ward re­vi­sions in OECD Amer­i­cas, Latin Amer­ica and the Mid­dle East. To­tal de­mand dur­ing the year is now ex­pected to reach 94.4 mb/d. The lat­est monthly data from US high­lighted a de­cline for the first time af­ter months of a ris­ing trend. Nev­er­the­less, the coun­try saw an in­crease in de­mand by about 0.2 mb/d dur­ing the first nine months of the year. The road trans­porta­tion sec­tor con­tin­ues to be the main fac­tor for the in­crease in de­mand with fu­ture eco­nomic growth sup­port­ing this fac­tor, while fuel sub­sti­tu­tion and ve­hi­cle ef­fi­cien­cies are key down­side risks. Oil de­mand in Latin Amer­ica con­tin­ued to re­main in the neg­a­tive ter­ri­tory but the de­cline was smaller due to the Rio Olympic Games. De­mand trends in OECD Europe was also weak with a ma­jor­ity of the coun­tries in the re­gion wit­ness­ing slow­down in July-16 fol­lowed by stag­nant de­mand dur­ing Au­gust-16. Nev­er­the­less, for YTD-16, the re­gion recorded 0.2 mb/d in­crease in de­mand. Sur­pris­ingly, gaso­line de­mand for this re­gion was flat year-on-year this year in ad­di­tion to LPG, but the rest of the prod­ucts saw higher year on year de­mand. In the OECD Asia Pa­cific re­gion, Ja­pan recorded de­cline in de­mand dur­ing Au­gust-16 as against his­tor­i­cal norms pri­mar­ily due to fuel sub­sti­tu­tion ef­fect. In Other Asia, In­dia recorded a 4 per­cent year-on-year or 0.41 mb/d growth in oil de­mand dur­ing Au­gust-16 as the coun­try con­tin­ues to see strong gaso­line de­mand that can also be gauged from the 17 per­cent in­crease in ve­hi­cle sales dur­ing Au­gust-16. In the Mid­dle East, af­ter four con­sec­u­tive months of de­cline, Saudi Ara­bia wit­nessed pos­i­tive oil de­mand growth of 2.2 per­cent in Au­gust-16 as a re­sult of trans­porta­tion fuel de­mand, es­pe­cially in the avi­a­tion sec­tor, due to the sum­mer hol­i­days. World oil de­mand growth for 2017 was kept rel­a­tively un­changed from last month at 1.15 mb/d and is ex­pected to reach 95.56 mb/d. Oil price lev­els are the de­ter­min­ing fac­tor for oil us­age in the road trans­porta­tion sec­tor that would drive oil de­mand, es­pe­cially in the US. More­over, the un­der­ly­ing eco­nomic growth across the globe would also push oil de­mand higher es­pe­cially in low growth non-OPEC coun­tries.

World Oil Sup­ply

Non-OPEC sup­ply fore­cast for 2016 was low­ered by 70tb/d and is ex­pected to see a de­cline of 0.68 mb/d to reach year end sup­ply ex­pec­ta­tion of 56.3 mb/d. The de­cline pri­mar­ily re­flected down­ward ad­just­ment of 135 tb/d in Q2-16 due to lower-than-ex­pected oil pro­duc­tion from the US, Canada, UK, Ar­gentina, Turk­menistan, Rus­sia, and Congo dur­ing the quar­ter. The re­vi­sion also re­flected an up­ward re­vi­sion of 60 tb/d to the 2015 base­line, mainly for the US. Num­bers for 4Q-16 ex­pec­ta­tions were also ad­justed that re­flected in the full year fore­cast, in­clud­ing a 121 tb/d up­ward ad­just­ment for Rus­sia high­light­ing the coun­try’s up­graded pro­duc­tion fore­cast.

Ac­cord­ing to the pre­lim­i­nary data, sup­ply dur­ing 3Q-16 de­clined by 0.71 mb/d. Dur­ing Septem­ber-16, world liq­uid sup­ply in­creased by 1.46 mb/d and av­er­aged at 96.4 mb/d as some of the sup­ply out­ages of the sec­ond quar­ter came back online. In ad­di­tion, ac­cord­ing to the lat­est data from Baker Hughes, world­wide rig count was up by 37 dur­ing Septem­ber-16 as com­pared to the pre­vi­ous month. The en­tire in­crease was led by 40 new ad­di­tions in North Amer­ica (28 in the US and 12 in Canada), 7 rigs in the Mid­dle East and 2 in Latin Amer­ica that was par­tially off­set by a de­cline of 3 rigs for the rest of the world. Sup­ply growth ex­pec­ta­tions for 2017 was re­vised up­ward by 40 tb/d to 0.24 mb/d and the sup­ply for the year is now ex­pected to reach 56.54 mb/d. The down­ward ad­just­ments made for 2016 and the up­graded sup­ply fore­cast for Rus­sia were the main fac­tors for the up­ward re­vi­sion for 2017.

OPEC Oil Pro­duc­tion & Spare Ca­pac­ity

Monthly crude out­put by OPEC mem­bers con­tin­ued to rise dur­ing Septem­ber-16. Ac­cord­ing to Bloomberg, the group pro­duced at the rate of 33.8 mb/d, an in­crease of 170 tb/d as com­pared to the pre­vi­ous month. The in­crease was pri­mar­ily on the back of higher pro­duc­tion in Nige­ria and Libya as both the coun­tries emerged from months of dis­rup­tion in crude pro­duc­tion. Iraq also con­tin­ued to pump at the rate of 4.5 mb/d (+60 tb/d) but the in­crease was off­set by de­cline in pro­duc­tion by Saudi Ara­bia (-60 tb/d). Libya’s NOC reached an agree­ment in Septem­ber af­ter which the coun­try’s ports re­sumed ship­ment of oil. The coun­try also re­sumed oil pro­duc­tion at some of the sites that had stopped pro­duc­tion due to po­lit­i­cal is­sues. Ac­cord­ing to Bloomberg, the av­er­age monthly pro­duc­tion dur­ing Septem­ber was at 340 tb/b, an in­crease of 80 tb/d from the pre­vi­ous month. The Chair­man of NOC said that the coun­try is cur­rently pro­duc­ing at 0.54 mb/d and has plans to scale up the pro­duc­tion to 0.9 mb/d by the end of the year, the high­est pro­duc­tion since June13. A fur­ther 0.24 mb/d is ex­pected to be added next year. On the other hand, Nige­ria added 110 tb/d dur­ing Septem­ber-16 as the force ma­jeure on its Bon­nie Light crude was lifted early last month. More­over, the the Nige­rian Na­tional Petroleum Cor­po­ra­tion (NNPC) has es­ti­mated an ad­di­tional 0.2 mb/d in­crease in the coun­try’s oil out­put by Q1-18 af­ter com­mis­sion­ing of an off­shore project. Mean­while, Iraq also added 60 tb/d dur­ing the month as the coun­try has been ramp­ing up oil pro­duc­tion re­cently. Iraq’s pro­duc­tion is set to in­crease fur­ther in the next few weeks as it is set to add ad­di­tional wells in Kur­dis­tan. Ac­cord­ing to a re­port, the out­put from the Tawke field is ex­pected to rise to 0.135 mb/d from a 3Q-16 av­er­age of 0.109 mb/d.

On the pos­i­tive side, we be­lieve that the pace at which Iran added pro­duc­tion in re­cent months would slow­down as seen in Sep-16 (10 tb/d) that would pro­vide some re­lief from fur­ther shocks. With the above coun­tries ex­pected to add ad­di­tional out­put in the near term, we be­lieve that the cuts that is es­ti­mated to be agreed in Novem­ber would have to be much larger than cur­rently spec­u­lated. This is pos­si­ble if non-OPEC pro­duc­ers join the ac­cord which will be a dif­fi­cult ne­go­ti­a­tion.

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