• Rebalancing The Oil Market: Issues To Watch

    The ruinous tussle for market share between tight oil producers in North America and, in the main, members of Organization of the Petroleum Exporting Countries, OPEC, saw crude oil prices slump by more than 70% from the second quarter of 2014 to twelve-year lows in the first quarter of 2016. Prices have rebounded somewhat, driven by a production reduction accord reached on 30 November 2016. The accord which was reached by twenty-four OPEC and non-OPEC producers aimed to rebalance the oil market by reining-in the massive supply overhang.

    There are indications that the accord may be having its intended effect on the oil market. With the narrowing of the spread between front month and second month for the U.S. benchmark for example, traders that had bet on contango ─ having stored oil lots bought cheaply with a bid to sell later at much higher prices ─ are finding it increasingly less profitable to keep the lots in storage. And so, from storages such as in the Gulf of Mexico and South Africa, crude oil is slowly being shipped out.

    While there is a perception that global oil market rebalancing is on track, there are issues that may derail the process; and these four are informative.

    Accord Compliance

    The aggregate compliance rate for the first month of that production reduction accord was high, though some of the production cuts agreed under the accord represent natural production declines which would have happened with or without the accord. Non-OPEC compliance was about 50% while that of OPEC stood at about 97%. However, it is anyone’s guess if that compliance rate ─ or even any significant rate ─ can be sustained, especially where there are neither credible production records nor effective sanctions for production violations. In the case of OPEC, for example, production cuts were allotted to members based on October production figures derived from secondary sources. However, according to an analysis by Petroleum Economist (subscription required), Iraq, which claims that her October output was at least 250,000 barrels per day (bpd) higher than the basis for her allotted value, only cut production by 109,000 bpd, about 52% of the pledged 210,000 bpd in the first month of the accord. In addition, records show that the country’s exports increased in February. Angola is also reported to have fallen short of her pledged reduction target for the month of February. Continue reading  Post ID 586

  • The Internecine Duel For Oil Market Share

    The crude oil producer-group, Organization of the Petroleum Exporting Countries, OPEC, in November 2014, adopted a laissez faire output policy which essentially removed caps on members’ supply quotas. Driven in the main by Saudi Arabia and some Gulf producers, the policy was a thinly-veiled attempt to drive the higher-cost (mostly North American tight oil) producers offline and ensure a good share of the global oil market. On a year-on-year basis, petroleum liquids additions by North American tight oil producers rose from 44,000 barrels per day (bpd) in 2006 to a staggering 1.7 million bpd in 2014, according to a report by Rystad Energy. Though this was largely responsible for the massive global supply overhang ─ which exceeded 2.5 million bpd in 2015 ─ the response by top producers, Saudi Arabia and Russia as well as Iran and Iraq among others, unleashing their massive supply capacities, only served to exacerbate the condition. Global crude oil prices plummeted to multiyear lows. In what was loosely termed a ‘‘sheikh-versus-shale’’ duel, this bid for better market share exacted a devastating toll on the duelling spigots.

    North American Tight Oil Producers

    When global crude oil prices were well-above US$100 per barrel, tight oil producers in North America, which in the main, had breakeven oil prices in the US$65 – US$90 per barrel range, stayed profitable. However, when falling prices tested US$26 per barrel and even stayed low for months on end, many of these producers were forced offline, and quite a few, permanently. Data from the law firm, Haynes and Boone LLP, show that in the period from January 2015 to 14 December 2016, there were 114 bankruptcy filings in the North American upstream sector and with a total debt of more than US$74 billion. For many of the ‘‘oil-rigged’’ states and provinces, taxes on proceeds from oil and oil-related businesses formed a major proportion of revenue; for some, tax proceeds from such businesses exceeded US$5 billion in 2014. Continue reading  Post ID 560

  • Global Crude Oil Rebalancing And The Producers’ Accord

    Crude oil prices plummeted from more than US$110 per barrel in the second quarter of 2014 to just above US$26 per barrel in the first quarter of 2016. This was due to massive supply additions by tight oil producers followed by ramp-ups by major producer-countries such as Saudi Arabia and Russia. The global crude oil imbalance ─ excess of supply over demand ─ exceeded a staggering 2 million barrels per day (bpd) by the second quarter of 2015, exerting downward pressures on prices. Market speculations about the necessary trigger for a global rebalancing grew rife. Large supply outages early last year, which bore such ascription proved false.

    With proceeds buffeted by a protracted low-price regime, major oil-producing countries ─ excluding the United States ─ agreed late last year to cut production, effective January 2017 and rein-in the supply overhang. The agreement provided for a total supply cut of 1.8 million bpd for the first six months of 2017 with the option of a rollover for a further six months. The Organization of the Petroleum Exporting Countries, OPEC ─ excluding Nigeria and Libya, both of which had and still have issues of domestic unrest ─ agreed to a supply cut of 1.2 million bpd while for the eleven non-OPEC countries, the agreed cut was 600,000 bpd.

    For both investors and analysts alike, three issues underscore concerns about the accord’s capacity to rebalance the global oil market:

    First, a record of breaches of assigned production quotas among OPEC members; second, the lack of an effective mechanism for enforcement of such production quotas; and finally, the effect on prices, of rebounding production, especially among the nimbler United States shale producers.

    It is really no secret that some OPEC countries have often violated their production quotas with little or no effective sanctions applied. A report by World Oil for example, showed that even with a supply reduction agreement in place, crude oil shipments by OPEC member Iraq, increased during the first 15 days of February by 122,000 bpd over the average for January. While this could be counterbalanced by reductions in subsequent months, it only accentuates concerns about compliance.

    However, due perhaps to the magnitude of the afore-mentioned slump in proceeds, the compliance rate for OPEC under that November accord was high for the first month. Per a report by Argus, the group reduced output by 1.14 million bpd out of the agreed target of 1.17 million bpd (a 97% compliance rate) between December 2016 and January 2017; Saudi Arabia exceeded its agreed reduction quota by 16%. For non-OPEC members, that rate was less than 50%. That said, whether a significant compliance rate among the groups can be sustained, remains to be seen.
    Continue reading  Post ID 546