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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Crude Rises Ahead Of Non-OPEC Meeting

Offshore oil rig

The mood of crude has flipped again, with optimism rising ahead of the NOPEC meeting at the weekend. Even though doubts persist, for today, oil prices push higher. Hark, here are six things to consider in oil markets today.

1) We discussed on Monday how the Kurdistan Regional Government (KRG) is expecting no major impact to its crude oil production from the OPEC decision, and how crude from northern Iraq flows through the 600-mile Kirkuk-Ceyhan pipeline before being loaded onto tankers in the Turkish port.

The KRG controls ~550,000 bpd, and has indicated that it doesn't plan to scale back on production. Iraq needs to cut production by 210,000 bpd to meet its OPEC cut quota, but 90 percent of the crude produced in the non-Kurdish controlled areas is operated by international oil companies. The state-run oil company controls some 440,000 bpd of Iraq's production, with 280,000 bpd of this in the south. These fields are the ones that are expected to feel the brunt of the OPEC production cut:

(Click to enlarge)

2) Italy is the leading destination for Kirkuk crude, accounting for over a third of all exports this year - some 155,000 bpd. Israel is the second most popular destination, while Cyprus is third - despite an absence of deliveries over the last three months. The key takeaway in terms of Iraqi crude flows is that southern grades (i.e., Basrah Light and Basrah Heavy) predominantly head to Asia, while northern grades (Kirkuk) head predominantly to Europe.

(Click to enlarge)

3) Timing is everything. Back in late November we discussed how Saudi production is up over 2 million barrels per day since the start of 2011, while Iranian output is flat over the same period. We get a similarly confounding view when we look at OPEC versus non-OPEC production growth since the beginning of 2012. Related: Will We See $60 Oil By Christmas?

Despite the pullback in U.S. production in the last year and a half, non-OPEC production is still up over 5.5mn bpd, while OPEC production is up 1.44mn bpd. OPEC production was basically flat from 2011 to mid-2015 before taking off, coinciding with non-OPEC moving in the opposite direction.

(Click to enlarge)

4) Our ClipperData is cited in this article about the narrowing contango of the forward curve. Our ClipperData show that global floating storage is well over 100 million barrels, but we should see this volume whittled lower should the financial incentive to store crude continue to be erased. The contango needs to be at $3.15 - $3.38/bbl six months out to make a profit after covering the cost of leasing an oil tanker to store the black gold, Texas tea.

5) The cost of leasing an oil tanker is expected to drop further next year, with the industry bracing itself for the worst earnings since 2013. Rates are now 12 percent lower than they were prior to the OPEC meeting - given the expectation that the decision will lead to higher oil prices, lower demand and less trade. As the chart below illustrates, shipping rates move inversely to prices:

(Click to enlarge)

6) Finally, after discussing the prospects of a U.S. Gulf Coast LNG benchmark yesterday, it is particularly interesting to see that 80 percent of global LNG supply this year is priced off an oil index, as opposed to a LNG-based benchmark. Room for change, me thinks.

By Matt Smith

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