OPEC+ deal: Separating the forest from the trees
he oil market reaction to Sunday’s OPEC+ production deal speaks to concerns that global production levels may become excessive, resulting in an oversupplied oil balance.
This is a view we do not share. Our analysis of the effect from the quota increases for the last five months of the year and the agreed-to changes in “base output” figures come May 2022 will not prevent a further, significant tightening of the oil balance.
In point of fact, other than an event that causes the global economy to become unhinged (be it the pandemic or some other development), the expected normalization of economic activity and the related recovery in global oil demand will occur in the face of disproportionately smaller gains from non-OPEC+ supply.
While there are nearly 80 countries that constitute non-OPEC production, nearly 100 percent of output gains over the past 10 years came from US shale oil, and we believe US shale is in its twilight phase — a situation we published about starting in 2019, based on analyses of output trends.
We would also be remiss in not noting that global capital expenditures for oil production have fallen by $2.2 trillion since the high watermark in 2014, raising concerns about sufficient capacity to deal with future oil demand growth.
This cross current looks to test the world’s supply capacity before the end of 2022. While this is a view we have espoused previously, it seems most market watchers and pundits missed the bigger picture story behind OPEC+’s quota deal, namely a concern we have about global supply/ demand becoming over-tightened.
We also feel compelled to note that the architect of the OPEC+ quota deal (Saudi Arabia) has been mindful of preventing a situation in which additional oil supply is “pushed” into the oil market as opposed to demand pressure “pulling” extra barrels from the producer group; the former typically introduces bearish price pressures.
As to our math about Sunday’s quota deal, the global oil balance is forecast by us to see a contraseasonal inventory draw in the current quarter of the year, and the fourth quarter period is forecast to see a further draw on global inventories of about 164 million barrels. This is triple the size of the average fourth quarter change seen over the past seven years.
Based on a proprietary oil inventory/oil price model we maintain, every 50-million-barrel change in global oil inventories results in an $8.50/barrel change in monthly average Brent crude prices.