OPEC's Fake Results and Upcoming Quagmire

Robert Boslego - INO.com Contributor - Energies


OPEC’s market monitoring committee reported that OPEC reached “120% compliance” with the production adjustments. It also reported that commercial OECD stocks had been reduced by 178 million barrels “since the beginning of the year.”

In reality, OPEC exceeded its collective production limit by about 850,000 b/d in September. It reported production at 32.748 million barrels per day, but that level must be adjusted to be comparable to the 32.5 million production ceiling it set last November.

To get a comparable figure, two adjustments must be made. Production from Indonesia must be added (740,000 b/d) because its output was included in the ceiling, notwithstanding it was dropping out. And production from Equatorial Guinea (140,000 b/d) must be deducted because it was not an OPEC member and its output was not included. Continue reading "OPEC's Fake Results and Upcoming Quagmire"

Oil Market Outlook Deteriorating With OPEC's Production Rise

Robert Boslego - INO.com Contributor - Energies


According to OPEC, global OECD oil inventories fell 22 million barrels in June to end at 3.033 billion. But that figure is 252 million barrels above its five-year average. OPEC has targeted reducing those inventories to the average level, but its own supply-demand projections imply that goal will not be met through 2018, assuming it maintains production at the July 2018 level. In fact, there will be a 45 million barrel build in 2017, and an additional 162 million barrel build in 2018, even if production does not rise after the extension ends in March 2018. This implies that oil prices will need to be below marginal production costs for some time in order to limit production growth.

July Production

OPEC reported that production rose by 173,000 b/d in July to average 32.869 million barrels per day (mmbd). OPEC’s 32.5 mmbd ceiling included Indonesia but did not in Equatorial Guinea, and so the adjusted July figure was 33.449. This implies that OPEC produced 949,000 b/d above its ceiling, a large failure, especially considering that it had been claiming to be 100% (or more) compliant with its quotas. Continue reading "Oil Market Outlook Deteriorating With OPEC's Production Rise"

Analysis Of Saudi Export Reduction For August

Robert Boslego - INO.com Contributor - Energies


On July 24th, Saudi energy minister, Khalid Al-Falih, announced that Saudi Arabia would limit its exports to 6.6 million barrels a day (mmbd) in August. He noted that other producers were still exporting larger volumes of oil than their production cuts imply.

“We are not doing this to allow other countries to free ride and undercut the agreement by overproducing,” said Mr. Al-Falih, reflecting a high level of frustration. Observers described Mr. Al-Fahil as “very nervous” over the weekend.

Saudi energy minister Khalid Al-Falih
Saudi Energy Minister Khalid Al-Falih. PHOTO: IGOR RUSSAK/ZUMA PRESS

I believe he sensed or was advised that oil prices may drop precipitously if OPEC only reported continued-high compliance. Last Friday, John Kilduff had said this was a “make or break” meeting, and “that if nothing comes out of this meeting, the cartel and Russia will be punished mightily.” Continue reading "Analysis Of Saudi Export Reduction For August"

OPEC Deals Have Effectively Collapsed

Robert Boslego - INO.com Contributor - Energies


When OPEC announced its agreement 30 November 2016, it pledged to bring its collective ceiling to 32.5 million barrels per day (mmbd), effective 1st of January 2017. At the time, that ceiling included Indonesia, which was in the process of withdrawing from the cartel. The adjusted ceiling, therefore, became about 31.76 mmbd, excluding Indonesia’s 740,000 b/d output.

The deal was extended at the end of May for an additional nine months through March 2018. At the press conference, OPEC president and Saudi energy minister, Khalid Al-Falih, answered a question about the rising production in Libya and Nigeria. He responded by saying that other OPEC members would adjust their output accordingly to allow, for their increases.

But data throughout 2017, and most recently June, reveal no such adjustments have been made. According to Reuters, June production averaged 32.57 mmbd, about 820,000 b/d above its ceiling, as adjusted.

And Libyan production has continued to rise, topping 1.0 mmbd at month’s end. Nigerian exports are scheduled to reach at least two mmbd in August, 500,000 b/d higher than in the cartel’s base month (October 2016).

OPEC’s output in October was around 33.7 mmbd (including Indonesia). And so June’s production of 33.3 mmbd (including Indonesia) is only about 400,000 b/d lower.

Based on the above expectations for rising output in August, the OPEC deal is effectively dead. OPEC production will be back to about where it was in October. Continue reading "OPEC Deals Have Effectively Collapsed"

Why OPEC's Cut-Extension Is Another Blunder

Robert Boslego - INO.com Contributor - Energies


OPEC, led by Saudi Arabia, blundered when it decided to engage in a battle for market share in November 2014. It assumed it could drive American shale oil companies bankrupt and then pick up their market share.

But this strategy was destined to fail. For one thing, they didn’t take into account that American shale oil companies had hedged their future production. That protected the companies from experiencing the impact of lower prices to the extent that they had hedged.

Second, they didn’t take into account the American bankruptcy system. Companies can continue as “zombies” surviving by cutting costs to the bone, and selling assets to other companies at a discount to keep afloat. The buyers then have a lower “cost basis.”

Third, they didn’t take into account their own vulnerabilities. Sure, their national oil companies have low production costs but their oil revenues largely support the national budgets. They need high oil prices to balance their budgets, effectively making them high-cost producers (e.g., KSA about $65/b in 2017). Continue reading "Why OPEC's Cut-Extension Is Another Blunder"