All eyes on OPEC...again
IMAGINE ENERGY ministers and counterparts around a large, intricately-carved mahogany table with pizzas and plenty of caffeinated beverages, hunkered down to hash out global oil and gas supply and demand forces. Ok, so it's highly unlikely that's how it all goes down, but as I write, Saudi Minister of Energy and Industry Khalid Al-Falih is planning to meet with Alexander Novak, the current Minister of Energy of Russia, and Venezuela's Oil Minister Nelson Martinez is planning a similar meeting following talks with Algeria, Bloomberg reported April 26, citing a person familiar with the matter. The agenda? Will the Organization of Petroleum Exporting Countries (OPEC) and other producers, including Russia, extend the joint effort announced in November 2016 to curb supply? Recall that the agreement struck was for a cut by OPEC members of a combined 1.2 million barrels per day to 32.5 million barrels per day. Mentioning that talks with Russia, the biggest non-OPEC member exporter, were still to take place, Al-Falih told reporters in Baku in late April that there appeared to be a "consensus" in the direction of an extension, the Bloomberg report continued.
There seems to be consensus, too, in the commentary leading up to the imminent May 25 meeting. Many industry experts believe OPEC will decide to maintain the production cuts.
"We're now in the third month of OPEC production cuts and compliance within the OPEC-11 has been surprisingly strong," said Rory Johnston, Commodity Economist at Scotiabank, in an April 12 note. "We believe that the combination of high OECD [Organization for Economic Co-operation and Development] inventories, still-weak upstream investment outside the US and recent oil price weakness will prompt OPEC to extend their production cap through the end of the year."
Tortoise managing director and portfolio manager Rob Thummel commented on OPEC's cut compliance in an April 17 podcast. The International Energy Agency's Oil Market Report released the week prior answered a key question, he said. "Is OPEC complying with its production cut agreement? The answer for March was a resounding YES! In March, OPEC countries collectively reduced production by over the 1.2 million barrel per day agreed upon cut. In 2017, OPEC's average compliance with its stated production cut is 99%," he detailed. Non-OPEC compliance was "not quite as good," he continued, saying that production cuts from those countries, mainly Russia, amounted to 64% of their stated goal in March.
The aim of the production cuts is to balance the global oil market, reducing inventories to keep oil prices stable. In that regard, things appear to be on track.
"The IEA still expects the global oil market to be undersupplied in the second quarter resulting in declines in global oil inventories. Global oil demand growth typically accelerates in the second half of the year so if OPEC extends its production cut agreement through the end of 2017 then we would expect global oil inventories to decline at a faster rate in the third and fourth quarters of 2017," Thummel explained.
"Supported by signs of OPEC compliance, suggestions that Saudi Arabia wants to extend the OPEC production cut agreement through the end of 2017, and the first meaningful decline in US oil inventories, oil prices extended its April rally rising by almost 2% [for the week ending April 14]. In April, oil prices have increased by 5% and are only down by 1% this year," he said.
On track, but fragile is how Scotiabank painted the oil market recovery April 12, pointing to "OPEC output discipline; the pace of the US shale response; non-OPEC production declines outside the continental US and; the strength of consistently-underestimated global demand growth" as four trends poised to shape the oil market for the remainder of the year.
Currently, one of those trends, the pace of US shale response, appears upwardly mobile. This year, driven by shale activity, the Energy Information Administration expects US crude production to rise by 860,000 barrels per day. According to Baker Hughes Inc. data, rig activity increased every week for 13 weeks leading up to this writing.
While some wonder how long OPEC countries will watch the US shale industry drive production upward, RBC Capital Markets, in its Commodities Strategy Research Report dated April 25, pointed to Saudi Arabia's then-recent decision to reverse its planned salary and benefit cuts for civil service. To the point, the strategists said, "This reversal shows the limits to austerity and more importantly, increases the need for higher oil prices. Faced with a 'Hobson's choice' between preventing the return of Permian production and precluding social protests, we believe that ruling elites will opt for the latter and that they anchor the extension of the OPEC/non-OPEC output agreement next month."