The 171st Meeting of the OPEC Conference is scheduled to meet this Wednesday, 30 November, in Vienna, Austria. It's widely anticipated that OPEC (Organization of Petroleum Exporting Countries) will agree to cut oil production by at least 2.5% in their 10:00 AM EST announcement. OPEC last cut oil production in August, 2008.
Until this afternoon, the largest wild-card in the equation was Iraq, however they announced today that the fourth largest oil exporter in the world will cooperate with OPEC and called for a 4.546 million barrels per day reduction in production. Iran is similarly considering a cap on production, although they have yet to announce any projected levels.
Oil spiked on the news from Iraq, however it settled down before the close, today as the news was digested by commodity traders. As of this writing, WTI Crude is trading at 46.92 and Brent Crude is trading at 48.02.
It's important to note that four of the top ten oil producers in the world - Russia, the US, China, and Canada - are not members of the OPEC cartel. None have signaled either support or opposition to the OPEC plan, although all would benefit from a production cut accompanied by higher oil prices in 2017.
Ironically, the initial call for a cut in production came from Saudi Arabia, the world's largest producer. Starting in 2014, Saudi Arabia increased production dramatically, driving oil prices from their $100 per bbl range down to as low as $26 per bbl. Their intent at the time was to cripple the US shale market by driving price below a profitable level for the hydraulic fracturing wells used in the shale fields. While the price cuts did initially cripple the shale industry, price eventually stabilized in the mid-40s, thus mitigating the impact. Saudi wells could absorb the short-term impact on profitability, however as we head into the fourth year of abnormally low prices, the impact is now being felt across the Saudi Arabian economy.
Analyst expect at least a 2.5% production cut on Wednesday. This will likely cause significant volatility in the oil market for the short term, and we can expect to see an overreaction to the upside until the actual impact of the cut is determined. With refining currently at or near capacity, it's likely that the cuts will have little end-user impact over the long term, and we can expect oil to stabilize in the low to mid 50s in 2017. That's still lower than it should be, however it's far better for the economy as a whole than the excessively low range we saw in 2015 and parts of 2016.
Showing posts with label OPEC. Show all posts
Showing posts with label OPEC. Show all posts
Monday, November 28, 2016
Friday, July 22, 2016
Schlumberger Warns of Impending Severe Oil Supply Deficit
Schlumberger (NYSE:SLB) announced earnings after the bell yesterday, beating EPS estimates by $0.02 and revenue by $70 million. That's the good news. Everything else about the release points to a serious energy crisis looming in the not-too-distant future.
Demand in the oil industry continues to grow at a steady and aggressive pace. As the economies in the US, Europe, and China recover, that demand will increase. The supply side, however, has taken a horrendous hit over the past two years. CEO Paal Kibsgaard summed it up, "We are heading towards a significant global supply deficit as the E&P [exploration and production] spend rate now is down by more than 50%."
There has been a significant cost efficiency problem within the industry for some time, and that inefficiency in cash flow has been exacerbated by the dramatic plunge in oil prices worldwide over the past seven quarters. Rig operators have reacted to this price crisis with a massive reduction in oil field activity. Active rigs are now down to 25% of their original level, and the appetite to start new wells has reached a critical low. This has caused a ripple effect through the entire oil supply-chain industry, and it's about to reach critical mass.
Non-OPEC production is set to drop an additional 900,000 barrels per day. Similar weakness is being forecast in the non-Gulf OPEC nations, and as short-term high production activities run their course, the expectation is for an accelerated decline in overall oil production worldwide.
Kibsgaard went on to say, "The market is also underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators and to keep their options open as the downturn has deepened and extended into uncharted territory."
Cash flow from the rig operators is becoming strained, and they are delaying payments to creditors in an attempt to improve that flow. This, too, has a ripple effect through the supply-chain industry. What the entire environment demonstrates, though, is that as the service industry pricing inevitably improves - supply and demand will naturally force it - much of the capital that would normally be spent on exploration and production will instead be spent on debt reduction. That will put added pressure on the oil supply deficit, extending the duration of the pending crisis.
What all this means is that there will be continued negative pressure on the various industries that support all aspects of the oil business. Expect the metals industries to take a hit as both repairs to existing rigs and the development of new rigs are put on hold or canceled outright. Expect shipping to take a hit as the flow of supplies, raw materials, and energy resources to and from suppliers and operators continues to decline. Expect the chemicals industries to take a hit as there is less demand for the materials that are used in drilling and refining.
This is not good news for the consumer, either. We currently still have an oil glut, which, coupled with an uncharacteristically strong US dollar, is holding prices down for the moment. As that glut transitions to a supply shortfall over the coming year, however, we can anticipate a rapid rise in oil prices world-wide. That will dramatically impact the price at the pump, likely forcing gas prices to record highs around the world.
It will take some time for all of this to play out, but it does appear that the piper that played the tune of ridiculously low oil prices is poised to deliver the bill. Paying that bill will be painful at best.
Happy Trading.
Demand in the oil industry continues to grow at a steady and aggressive pace. As the economies in the US, Europe, and China recover, that demand will increase. The supply side, however, has taken a horrendous hit over the past two years. CEO Paal Kibsgaard summed it up, "We are heading towards a significant global supply deficit as the E&P [exploration and production] spend rate now is down by more than 50%."
There has been a significant cost efficiency problem within the industry for some time, and that inefficiency in cash flow has been exacerbated by the dramatic plunge in oil prices worldwide over the past seven quarters. Rig operators have reacted to this price crisis with a massive reduction in oil field activity. Active rigs are now down to 25% of their original level, and the appetite to start new wells has reached a critical low. This has caused a ripple effect through the entire oil supply-chain industry, and it's about to reach critical mass.
Non-OPEC production is set to drop an additional 900,000 barrels per day. Similar weakness is being forecast in the non-Gulf OPEC nations, and as short-term high production activities run their course, the expectation is for an accelerated decline in overall oil production worldwide.
Kibsgaard went on to say, "The market is also underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators and to keep their options open as the downturn has deepened and extended into uncharted territory."
Cash flow from the rig operators is becoming strained, and they are delaying payments to creditors in an attempt to improve that flow. This, too, has a ripple effect through the supply-chain industry. What the entire environment demonstrates, though, is that as the service industry pricing inevitably improves - supply and demand will naturally force it - much of the capital that would normally be spent on exploration and production will instead be spent on debt reduction. That will put added pressure on the oil supply deficit, extending the duration of the pending crisis.
What all this means is that there will be continued negative pressure on the various industries that support all aspects of the oil business. Expect the metals industries to take a hit as both repairs to existing rigs and the development of new rigs are put on hold or canceled outright. Expect shipping to take a hit as the flow of supplies, raw materials, and energy resources to and from suppliers and operators continues to decline. Expect the chemicals industries to take a hit as there is less demand for the materials that are used in drilling and refining.
This is not good news for the consumer, either. We currently still have an oil glut, which, coupled with an uncharacteristically strong US dollar, is holding prices down for the moment. As that glut transitions to a supply shortfall over the coming year, however, we can anticipate a rapid rise in oil prices world-wide. That will dramatically impact the price at the pump, likely forcing gas prices to record highs around the world.
It will take some time for all of this to play out, but it does appear that the piper that played the tune of ridiculously low oil prices is poised to deliver the bill. Paying that bill will be painful at best.
Happy Trading.
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