• Tag Archives Oil and Gas
  • 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

  • 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

  • The Investment Window In A Low Oil Price Regime

    Continued addition to the global oil supply glut as well as the sluggish global economy will most likely militate against any sustained price rebound in the near term. A low oil price regime presents deal windows for debt-burdened companies as well as those seeking strategic repositioning and which windows investors may also avail themselves of.

    The current crude oil price regime derives in the main, from market fundamentals: a weak global demand and a massive increase in supply. That increase in supply, over the past decade came from unconventional resources predominantly in the United States (shale) and Canada (oil sands); during that period, the petroleum group, Organization of the Petroleum Exporting Countries, OPEC, maintained output within a very narrow band.Change In Oil Production - OPEC, U.S. & Canada

    The group’s decision late last year ― driven primarily by Saudi Arabia, Kuwait, Qatar and United Arab Emirates ― not to reduce output levels in spite of the massive supply overhang, spurred what was termed in the media, a “sheik-versus-shale” turf war.

    If that decision was aimed at forcing production cutbacks among the higher-cost (unconventional) producers, then OPEC, with much lower production breakeven costs (US$10 – US$30 per barrel, US$/bbl) than United States (US$55/bbl – US$85/bbl) and Canadian (US$65/bbl – US$110/bbl) producers, has been able to do just that: of the seven key production regions in the United States for example, output for the month of March 2015 fell or remained unchanged in all but two, according to the Energy Information Administration. The rig count data as compiled by Baker Hughes is even more informative. The full rig report shows a 43% decline in U.S. rig count from the value for three months ago. Even the newly-employed operational efficiencies are not expected to countervail the effects of such steep decline rates. Production reports and rig counts are respectively, lagging and leading indicators of production trend, not withstanding imperfections in the latter. Continue reading  Post ID 315