Energy –
An especially wild day in energy futures yesterday. Obviously by now everyone knows OPEC came up to an agreement on a production cut. I have attached a breakdown here for your review and here are some stream-of-consciousness thoughts on the issue:
- For the longest time I could not understand the Iranian figures in the OPEC release. The figures showed Iran participating in the production cut based on what appeared to be a ridiculously large reference level, yet at the same time there is also a mention of Iran increasing production the same chart. I couldn’t figure it out on my own, but I did come across this posted on Twitter (attached below). While I don’t normally post Twitter snapshots here, I want to give the “author” credit for figuring out this OPEC “accounting”. This is from Nader Itayim (@ncitayim) who is apparently a correspondent for Argus Media
- Another interesting bit of “accounting” by OPEC is the Angola figure. The reference production levels for OPEC members were the Oct levels, except for Angola which used its Sep production figure. Their Sep production figure was much larger than their level in Oct, making it appear they’ve cut production. As shown in the attached breakdown, compared to their Oct total they’re actually allowed an increase in production.
- As the chart shows, for the countries participating in the production cuts based on Bloomberg Oct production totals the total production cut is closer to 1.28 mbpd rather than the reported 1.43 mbpd. Perhaps I’m splitting hairs here, but I think that is still worth pointing out.
- But that also leads to the countries not participating. Indonesia has production at a similar level for several months now, so it is unlikely their production figure changes a ton going forward. However, both Libyan and Nigerian production is bouncing off very depressed levels. Libyan production in Oct was estimated +180k bpd from Sep and Nigerian production was estimated +170k bpd. Both have ample room for growth from current levels, so how much of a cut are we really going to see? It’ll be interesting to see what these two countries’ Nov figures look like.
- Adding the new production figures for the participating countries and just assuming steady production from Libya, Nigeria, and Indonesia (vs. Oct) leads to an “OPEC” total of roughly 32.7 mbpd. So this could basically be seen as a production freeze from Apr/May levels.
- OPEC members insist the deal is contingent on non-OPEC participation. Russian officials stated yesterday they would participate by cutting by “up to” 300k bpd. This comes after Russia posted a 385k bpd Sep monthly production increase and a 123k bpd monthly increase in Oct. Again, it’ll be interesting to see what their Nov production level is and from what level they’re willing to cut.
So OPEC has yet another well engineered short squeeze and the crude oil bulls are having their moment in the spotlight. However, I’m still not entirely sure what impact this truly will have on global crude oil supplies. In addition to Libya and Nigeria above, we’ve also seen US domestic (shale) production has stabilized and is starting to turn up. Rig counts have been on the rise. US producers have become more efficient, and the EIA show new well oil production is up per-rig YOY in almost all shale areas (chart below). Sure this agreement takes some supply off the market in the short term, but I do question the upside following yesterday’s ~9% move.
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