John Hall : OPEC holds with Russia and the deal rolls on
Meanwhile, OPEC will be following the market closely, day by day, and so shall we until the next Meeting. In the meantime, everyone seemed careful not to talk about Shale so I should like to share a cartoon with you kindly provided by Joe McMonigle of Hedgeye Risk Management.
Like every OPEC Meeting, there was much conjecture beforehand but I felt there that there was only one option, to hold where they were and roll on, supposedly, for at least another nine months. Ministers seemed keen not to fuel gossip and upset the markets before any official agreement had been made particularly as traders had already built the anticipated cut in to pricing.
The choice was clear – hold on and maintain prices at this level, falter and watch them crash, cut further, push them higher and open the Shale floodgates. Not actually that simple but an easy and quick explanation.
However, in the short term that is the righteasy solution and OPEC has often thought short term. Yet, following on from the original decision to bring in the cuts, the strategy has worked well particularly as only a couple of years ago OPEC was again being written off as having lost control of the market.But there was a plan that many couldn’t see.
The issue now is that re-balancing in one sector requires something similar in another. With the price of oil holding around the $60 level, 14% up on where it was at the last meeting and 40% higher than it was two years ago, even higher prices could work against OPEC. The chart above illustrates the price movements and in particular the increase since the Meeting in May but it also shows stagnation in the number of US oil and gas rigs which is also good for OPEC and that is want they want to see.
However, demand is picking up further and OPEC and its non-OPEC partners will want it all but to keep the balance right, more oil will need to be released on the market.
Russia has played along and
the high-level dialogue
between the two countries,
now above ministerial level,
with King Salman visiting
Russia and meeting with
President Putin earlier this
For the Russian oil industry,
the cuts have not been
entirely successful as Russia
recognises that market share
will be lost as price rises in
line with rising demand and
production from competitors.
Saudi Arabia is also aware of this and with the non-OPEC producers casually holding on while Iran, Libya and Nigeria continue their aspirations to produce more outside the OPEC strategy.
Saudi, like Russia, does not wish to lose market share to them or US shale.
I spoke briefly to Ministers from Angola and Nigeria. Angola is now selling 60% of its oil to China and this will probably increase as demand from China picks up. Nigeria is still exempt from the cuts and holding output at 1.75mbpd, obviously mindful of the need for output control.
When I asked the Angolan Minister about the ongoing strategy his response was that if it was working well, there was no need to change! A very relaxed session it seemed.
So, in the shorter term, they have agreed to maintain the cuts beyond the 31st. March deadline until the end of next year but to review the situation at the meeting in June. By then they will have a greater understanding of the supply/demand and stock situations. In an ideal market, those who have cut should be allowed to increase their output as demand picks up and then
decrease if it falls back. There will need to be some phasing in and out.
In order to widen the appeal of OPEC and bring in more non-OPEC producers, either as members or partners, OPEC has invited several countries to attend this meeting as observers.
Russia was for many years one although the minister was not particularly keen on conversation but what was surprising today was that Russia was not in the main OPEC Meeting but did share the OPEC/Non-OPEC Meeting with Khalid Al-Falih, the Saudi Minister and spent several minutes praising his opposite number for hard work and energy and making the agreement
such a success. The dialogue between is day by day.
There is nothing new in this and over the years many have sat in on the meeting and left only to use OPEC’s strategy to their advantage. They are competitors and if they don’t want to join in it is pointless involving them.
Yesterday, in advance of the OPEC Meeting as such, the 2nd Technical Meeting of OPEC and non-OPEC Producing Countries took place at the OPEC Secretariat in Vienna, involving twentyfour OPEC and non-OPEC producers. They believe that conformity to the “cuts” has exceeded 100%, presumably not all by intention, and investment is coming back in to the industry.
Mr Al-Falih, confirmed that early in 2017 OECD commercial oil inventories were at
280mb above the five year average. They
have since dropped by 50% with the surplus
now standing at 140mb and since June, floating storage level has been drawn down by 50mb. He was proud of the progress made but also felt they were probably only half way to their goal.
He also stated that the future market environment looks encouraging, underpinned by a broad-based global economic recovery that is gathering pace with the IMF reporting that GDP growth in 2017 has been robust, estimated to be around 3.6% and 3.7% for 2018.
Away from OPEC, The IMF has published its
latest view on GDP growth which again gives
more support to OPEC in its strategy.
However, much of these indices are interlinked and the change in one can impact on another.
The advanced economies have performed better than expected in recent months and are on track to hit the target set earlier in the year. Likewise, the emerging markets has also performed well but looking ahead in to next year will exceed targets.
In Mr. Al-Falih’s view, the market is returning to balance which gives them the reason and the to claim success of their strategy and the first time in many years, so far, they are right. It has worked but he also warned that at times like this, commitment can waiver and that has been the problem for OPEC over the years. The signs are good but more needs to be done to bring back the Trillion dollars of investment in the industry that has been put on hold.
Looking around the room, one understood that Brazil and Colombia had been invited and Ghana too. They were not present in the OPEC Session although Egypt and Turkmenistan were. Mexico attended the second session but with declining output anyway was probably not in a position to get involved in talk about cuts. Elsewhere in Africa the two main OPEC producers, Libya and Nigeria were under pressure to join in the cuts but remained exempt from controls
and free to ramp up output where they can.
Venezuela, one of the countries with Algeria that original set this dialogue running, had a new Minister present but back home for him output is falling anyway, PDVSA management is being sacked, the country is in financial chaos so coming to an OPEC meeting is probably a relief for him, knowing that Saudi shares their view on maintaining the stability. So, for a change, there
were new faces around the OPEC arena. Later in the day the full 24 attended.
Maintaining the price at this level is of paramount importance to all OPEC members even though some will always want more. Their budgets reflect their spending aspirations as opposed to the true value of oil and they have learnt this too often at their own expense. Even $60+ is probably more than they had hoped for at the last meeting and with the understanding that the main players, namely Saudi and Russia see the sense in holding it at this level, the
strategy will run for a while longer, while in the background, geo-political tension continues to prevail and particularly between Saudi and Iran, with Russia siding with Iran.
The ongoing war in Yemen with Saudi and the US on the one side and Iran on the other and now with the Saudi Crown Prince, Mohammed bin Salman calling the Supreme Leader of Iran, Ayatollah Ali Khamenei, the Hitler of the Middle East, the situation has inflamed further. Saudi is now accusing Iran of supporting Hezbolla in Lebanon, extending the friction between the two.
Lebanon is a country that has recovered after many years of civil war, but is on the verge of being plunged back. Yet, in OPEC, Saudi has little control over Iran’s oil output.
Hassan Rouani, the President of Iran is something of a moderate and does not fully support the Supreme Leader’s Conservative views. As the person who negotiated the Nuclear deal with the West, to get sanctions lifted, he is keen to trade with countries outside Islam and the Middle East.
Of the western nations that Iran is working with, France is close to Iran and will be in the foreground of many oil
related projects that are
agreed with the West,
against US wishes.
Similarly, Rouani would be a person to perhaps discuss matters with Saudi and even with Russia as a mediator,
there are opportunities for a more peaceful Middle East.
Meanwhile, Iran’s output of oil has not been gaining the momentum hoped for, and seems to have faltered in recent days as shown in the chart above.
Back home in Saudi, the Crown Prince has initiated a purge on corruption. Several Princes and others have been under house arrest while their wealth has been toned down and upon payment of vast sums, individuals have been released.
Whatever the level of corruption they were supposedly involved in may be overshadowed by the fact that they were a threat to his authority and the opportunity was two-fold – to make the population aware that some control of wealth was being maintained, particularly important in a country with high unemployment rates and to solidify his authority on those that perhaps had too
The Arab Spring was not something that was viewed favourably by the rulers in Saudi and it is certainly not a country that would welcome Western democracy.
Apart from stock levels, OPEC is aware that major consumers like China, which for a time was faltering, has since recovered and its demand will be picking up. Good news for Angola in particular.
This year demand for oil products has risen by 1.6mbd and taken against the cut of 1.8mbp, gives an increased demand of
3.4mbpd and much of that would have been
taken up by OPEC and a similar demand increase can be expected this coming year.
As well as OPEC, the EIA and the IEA forecast that supply would be overtaken by demand this year and again, supported by
that 3.4mbpd, this has happened, while looking ahead, it will continue during 2018, probably supported by another 1.6 mbpd.
The price of oil has over time been selfregulating.
As demand picks up so too does supply. Price follows but when it reaches a certain level, demand falls back and the greater the surplus of production, the greater the fall in price falls. OPEC seems now to recognise this and has resolved to keep the
market truly balanced.
The two charts also
give an indication as to stock levels. The IEA is more generous to OPEC than the EIA but the assumption has been made that OPEC will continue the cuts until at least the end of this year. Each is recognising a similar trend which works well for OPEC in terms of its decision making at their Meetings.
Demand will pick up next year and the two main countries driving this will be the US and China and presumably the US will want to burn its own oil, even though much of it is now destined for export.
Of course, if President Trump is successful in resurrecting the US coal industry that will take pressure of the oil market, but in that respect, I feel OPEC will be better placed to manage the OECD oil inventories than the US will be in coaxing consumers back to coal.
With oil being traded in US Dollars, in spite of attempts of some producers to switch
to another currency, its
stability plays a major role in the industry and as it falls it effectively reduced the revenue for the sellers although this will be offset if they are buying industry relates goods in dollars.
The chart alongside if based on a basket of currencies and therefor does not necessarily favour one against the other. However, in recent weeks the dollar has fallen against the basket and in spite of greater revenue for the higher oil price, in real terms there has been a loss.
Naturally, there are fluctuations over time and after recent losses the dollar is still higher than it was over the last ten years. Some may complain over the short-term loss, but over the longer period it has improved considerably.
From the information and data available, all indicators show a positive outlook for OPEC but this does depend on the Members’ own recognition and their ability to maintain that status. The hawks of OPEC would go for more given the chance if they could yet even Venezuela has held back and seems to be entrusting the decision making to Saudi and Russia.
Taking all that is available and comparing trends over the last three years, I have set out the key indicators in the table below. We have taken the figures in three separate dates – December 2015 when OPEC was really facing disaster and compared the changes since then and also in May when we had the last meeting. All indicators are more or less in OPEC’s favour.
The strategy has worked well with oil prices for the OPEC Basket have risen by more than either the Brent or WTI levels. OPEC output has fallen since May by 5.5% although up slightly against the figure in December 2015.
The US rig count has fluctuated but since the last meeting has risen marginally by 2.4% but is still slightly below the figure of two years ago, while oil production has hardly changed. Saudi and Russia know that if the price rises any further, the rig count will rise and with it will come the US shale to capture markets share from OPEC and Russia.
US oil stocks have fallen while overall OECD stocks have not changed much between the dates shown. All good news for OPEC, as it is now, but the threat will come if price is allowed to increase, bringing in the competition and flooding the market again.
Both OPEC and Russia need to work together and ensure all participants, OPEC and non- OPEC remain focussed on the strict long-term agenda.
As an aside, I met with Sam Madani of Tanker Trackers. His company uses technology to track shipments of oil from various locations, primarily in the Middle East and a copy of their report for October is shown below.
Export data figures are often disputed as are many but in this instance, a significant reduction in the published figures is shown. One cannot confirm or deny the accuracy of these numbers but the report does serve to emphasise how difficult it is to obtain verifiable data in this market.
Looking ahead, I have set out below the Monthly Forecast Outlook from Reuters which was taken on 31st. October, one month ago. Ranges vary and the market continues to send out new messages day by and over the month we have seen many fluctuations.
It is interesting to note that lower prices are being shown than those reported in April in spite of the stronger market that OPEC has created.
But with OPEC holding firm and very strongly supported by Russia, against the market gossip prevailing beforehand, it would seem that this partnership will run on, certainly until June and my guess is that by then they will have a strategy in place to deal with changing market dynamics – keeping shale and bay and the price in line.
Once the price moves closer to the $65 level, competition will move in and lead to another free for all amongst producers and that would put Saudi against both Russia and the US. Even the Iraqi minister is reported to have said that even $65 would be too high.
Estimating where prices will materialise will depend on the ongoing strategy that OPEC manages to keep in place. From the last Meeting they have done better than I had expected. So, providing that they manage to keep output balanced, either as it is or higher, we can expect to see the price remain around the $60 level until the next meeting. If it goes much higher, shale will return and they don’t want that.
Meanwhile, OPEC will be following the market closely, day by day, and so shall we until the next Meeting. In the meantime, everyone seemed careful not to talk about Shale so I should like to share a cartoon with you kindly provided by Joe McMonigle of Hedgeye Risk Management (above).
OPEC assigned 2018 new production quotas
John Hall is Chairman of Alfa Energy . Any comments or queries, please contact me – John Hall, John.Hall@Alfaenergy.co.uk +44 7880 367773 or + 44 7785 274530. Petroleumworld does not necessarily share these views.
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