Will OPEC Deliver Its Output Cut Deal? Here’s How We’ll Know.
Prices will be ‘whipsawed’ as output data emerges: Barclays
Oil held in storage is ‘key unknown’ for analysts: EIA
The promise of production cuts from OPEC and its partners sent oil rallying in 2016. Now traders want proof they’re delivering on those vows. It won’t come easy. The challenge: Building a coherent picture from the morass of data that emerges at each step along the process, from the wellheads where the oil is produced, to the tankers that carry it, and the depots that store it. Unlike in the U.S., where output is published weekly, members of the Organization of Petroleum Exporting Countries can take months to disclose their production. Beyond that, their data can be at odds with independent surveys, and countries have been known to cheat on such deals. With a rising U.S. rig count offering a bearish undertone, each new hint on the accord’s implementation can be expected to swing prices.
“The market could be whipsawed more by data and headlines than in the past,” said Michael Cohen, head of energy commodities research at Barclays Plc in New York, in a telephone interview. “Data lags will be the primary problem in tracking cuts.” Brent crude, the global benchmark, has surged 24 percent since Nov. 29, the day before the deal was sealed among OPEC’s members. The grade was trading at $57.36 a barrel at 11:01 a.m. in London. Future price increases for crude will depend on a wide variety of signposts. Here’s a breakdown on what to look for:
The first indications will come at the start of next month, when media outlets such as Bloomberg, Thomson Reuters and Platts publish surveys of production. Estimates from institutions such as the International Energy Agency and U.S. Energy Information Administration arrive a week or two later. As “no one’s counting barrels at Abqaiq,” the Saudi oil-processing facility, these have to be modeled on computers, Barclays’ Cohen says. “While we consider official production data published by OPEC governments, we come up with our own estimates,” said Lejla Villar, an analyst who estimates OPEC output at the EIA, part of the U.S. Energy Department. “We look at crude oil loadings, estimated domestic consumption and refinery runs, storage, and whatever else might be relevant.”
OPEC won’t publish production levels until the middle of next month. Even then, the waters will be muddied as the organization provides two sets of data: the one used to monitor the agreement, compiled from the surveys described above, and numbers submitted directly by member governments, which can differ significantly.
Monitoring the 11 non-members collaborating in the deal could be even harder, as data for the smaller producers like South Sudan and Equatorial Guinea are very patchy. “At the moment it’s hard to be sure how much announced production cuts have been followed or matched by actual changes,” said Damian Kennaby, director in the oil markets team at IHS Markit Ltd, whose estimates are among the external ones used by OPEC. “There are very few data on current production numbers and balances.” To provide more clarity, OPEC and its partners have established a monitoring committee, to hold its first meeting in Vienna from Jan. 21 to Jan. 22, though the panel hasn’t yet said in detail how it will operate.
While the agreement applies to production, changes in exports will be felt more acutely by the international oil market. National producers notify customers months in advance what cargoes are available, which means some details on exports are already known. Iraq’s shipping schedules, for instance, show the country’s sales will increase rather than decrease next month, though the country subsequently said buyers should prepare for lower volumes. Once the oil is on the water there’s a range of services dedicated to following its flow, from ship-tracking data compiled by Bloomberg to companies such as Petro-Logistics SA and Oil Movements. Satellite-tracking means these shipments can be estimated almost in real-time. Still, a drop in exports might not guarantee a change in production, according to the EIA.
“The question of storage is the key unknown when estimating production using export data,” said the EIA’s Villar. “It’s difficult to know how much of the lifted crude each month comes from storage and how much from production in that particular month.” Furthermore the size of the cuts, at just 4 percent of OPEC’s total output, “is not necessarily enough to have an impact on the number of tankers,” said Olivier Jakob, managing director at consultants Petromatrix GmbH.
Clearing bloated oil inventories, rather than achieving a particular price, has always been the stated aim of OPEC’s intervention. The group estimates that the world’s tanks are overstuffed by more than 300 million barrels, or enough to satisfy China for almost a month.
Yet if stockpiles are the most important metric, the problem is that they are perhaps the most lagging, with data from the IEA arriving about two months in arrears. The agency previously assumed inventories wouldn’t drop until the end of 2017. It now estimates that OPEC’s cuts could start to deplete inventories as early as the first quarter, which means data from this definitive gauge would arrive in April or May.
OPEC, meanwhile, has said that while the deal will speed up the re-balancing of the global oil market, it won’t result in demand exceeding supply until the second half of the year. Even if OPEC delivers the cuts promised, there’s still the risk of backsliding if their competitors in the U.S. respond by ramping up drilling, said Chip Hodge, who oversees a $12 billion natural-resource bond portfolio as senior managing director at John Hancock in Boston. “If activity picks up dramatically here, it might push other producers into cheating because of what that means for prices,” he said.
Where the Brent price is going?
* Saudi Arabia, Abu Dhabi are both cutting supplies
* But analysts doubt all producers will implement planned cuts
* Iraq seen as doubtful to fully implement its cuts
Oil prices edged higher by mid-morning on Friday as signs of output cuts by Opec members met with lingering concern that other producers could try to shirk their share of planned decreases aimed at curbing global oversupply. Brent crude futures, the benchmark for international oil prices, were trading at $57.34 per barrel at 1033 GMT, up 45 cents from the previous close. In the United States, West Texas Intermediate (WTI) crude futures were at $54.19 a barrel, 43 cents above their last settlement. Both contracts were largely flat on the week after days of choppy trading.
“There’s a lot of volatility, or at least changes in direction,” ABN Amro senior energy economist Hans van Cleef said. “People think the long-term trend is up, but after a gain of a few dollars, they take profit.” Production cuts by Opec kingpin Saudi Arabia and signs that it plans further trims have helped buoy the market.
The Kingdom cut oil output in January by at least 486,000 barrels per day (bpd) to 10.058 million bpd, fully implementing an agreement by the Organization of the Petroleum Exporting Countries (Opec) and other producers to curb a global supply glut. State oil giant Saudi Aramco has started talks with customers globally on possible cuts of 3 percent to 7 percent in February crude loadings.
There are also reports of supply cuts from Abu Dhabi. Still, doubts remained that all producers would fully implement planned reductions. “There will be some countries who will cheat…we expect zero compliance from Baghdad… And we definitely do not expect the Kurds to join in, given that they are autonomous from the federal government,” Energy Aspects said in its 2017 oil market outlook, published this week.
Overall supply from Opec in December fell only slightly to 34.18 million barrels per day (bpd) from a revised 34.38 million bpd in November, according to a Reuters survey this week based on shipping data and information from industry sources. But Opec was not the only factor; analysts pointed to a strong US dollar, which edged back from a 14-year high this week, and gains in US oil product inventories as holding them in a relatively narrow range.
Sources: QGN, Gulf Agencies, Barclays, EIA, GT, Bloomberg.