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All Eyes On OPEC As Oil Prices Sink

OPEC

Oil prices have been falling throughout the week, hitting a 10-month low on Wednesday, but Friday trading has seen a slight recovery.

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Oil prices hit ten-month lows this week, pushing crude oil well into bear market territory. Hopes of the OPEC deal balancing the market are fading fast. The plunging price took a breather on Thursday and Friday, hovering at the lowest levels since the third quarter of 2016.

Deeper OPEC cuts? There is a growing consensus that the OPEC cuts won’t be enough to drain inventories, so there are murmurings about the possibility of deeper cuts. Iran’s oil minister suggested the idea on state radio earlier this week. But that seems like a remote possibility at this point. Russia has previously dismissed the idea, and very few other producers have shown any interest. The prospect of deeper cuts would help prices but also cede even more OPEC market share to rival drillers. As a result, OPEC is likely to let the market sort itself out for the time being. Meanwhile, the head of Macquarie predicts that the agreement will expire and fall apart at the end of the compliance period in March 2018. "We actually see this OPEC agreement breaking up towards the middle of next year. In that case, we're going to see a huge amount of extra oil on the market next year," Macquarie’s head of European oil and gas research, Ian Reid warned.

Sub-$40 oil is “problematic.” Oil prices falling to the low-$40s has raised a number of questions about the viability of U.S. shale below the $40 threshold. Mathew Kaleel of Janus Henderson told CNBC that shale production below $40 per barrel is “problematic,” and that a lot of it would be “loss-making.” Other analysts agreed with that sentiment, while also predicting that there is a good chance prices dip below the $40 threshold soon. At the same time, Kaleel noted that prices would have to move higher in the medium-term to encourage more production.

Saudi royal succession shakeup. Saudi Arabia’s deputy crown prince Mohammed bin Salman was promoted to crown prince this week, a move that puts the 31-year-old on track to become the youngest king in the country’s history. The succession reshuffling will have implications for the oil markets. The new crown prince is hawkish towards regional rivals such as Iran and Qatar, so conflict could escalate. But he is also spearheading an economic modernization campaign, the centerpiece of which is the partial IPO of Saudi Aramco. That necessitates higher oil prices, so it is unlikely that Saudi Arabia wants to see oil prices stay low for too long. Related: Macquarie: OPEC Deal To Collapse In 2018

Qatar crisis continues. Saudi Arabia and several of its allies sent a list of demands to Qatar, calling for the closure of the Qatari Al Jazeera TV network, along with the closure of a Turkish military base in Qatar. The demands, analysts say, are impossible for Qatar to agree to. As such, the boycott and blockade of the country is likely to continue.

Nigerian exemption to OPEC cuts in jeopardy. Along with Libya, Nigeria has been exempted from the OPEC production cuts due to the large volume of oil that was disrupted from militant attacks on pipelines and other infrastructure. Now, Nigeria is restoring output quickly, having ramped up to 1.73 million barrels per day (mb/d) in May, up from a low of 1.2 mb/d last year. After Royal Dutch Shell (NYSE: RDS.A) lifted the force majeure on its Forcados export terminal just a few weeks ago, more gains from Nigeria are expected. Platts estimates Nigerian production will rise to 2 mb/d by August. If that occurs, and output appears to be sustainable, Nigeria’s exemption could be scrapped at a future OPEC meeting, analysts say.

Natural gas prices could rise. With record levels of U.S. natural gas exports, along with stagnant production, the two-year glut of natural gas supply could dissipate later this year. Heading into the winter heating season, natural gas inventories might actually dip below the five-year average, according to Bloomberg. "If we have low inventory and a normal winter, that basically sets up the stage for a bullish market in 2018," said Tai Liu, an analyst at Bloomberg New Energy Finance.

U.S Northeast oversupplied with gasoline. The Colonial Pipeline, a major artery that transports gasoline from the U.S. Gulf Coast to the mid-Atlantic and Northeast, is running below capacity, according to Reuters. Its operator says that supplies in the northeast are flush, leading to the lowest level of demand for the pipeline in six years. The pipeline ran below capacity for five days, the longest stretch since 2011. Typically, demand exceeds supply, forcing East Coast and Northeast refiners to import extra supplies to satiate demand. The unusually high levels of gasoline inventories is a bearish sign that the market is oversupplied. Related: The Biggest Obstacles For China’s $900 Billion Silk Road

Floating storage signals glut persists, but also some optimism. The recent uptick in floating storage is a sign that the oil market remains oversupplied. Costly storage on tankers tends to occur only in a depressed oil market. But RBC Capital Markets looks at the bright side of things, arguing that floating storage is occurring because traders think that oil prices will rise. The cost of storing oil at sea “becomes negligible if spot prices rally,” RBC wrote in a note.

Tropical storm knocks Gulf of Mexico production offline. About 39 production platforms in the Gulf of Mexico were evacuated as Tropical Storm Cindy made its way through the region. The storm shut in about one-sixth of the Gulf of Mexico’s total production, and a natural gas gathering system offshore had to declare force majeure. JBS Energy says that about 300,000 bpd of oil production have been affected.

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  • Dan Foster on June 23 2017 said:
    Let's face it. In the U.S. it's all about the endless rain. Everyone, head out West !!
  • Citizen Oil on June 23 2017 said:
    As with most things they do, the USA shows moderation is not in their vocabulary. Short sighted , suicidal excess will once again teach them and their investors a lesson. Why are service company stocks being hammered even though they are commanding much higher fees ? Because the market knows this will once again end poorly for all involved. Instead of boom /bust cycles every few decades , we are looking at this happening every 2-3 years now. Yippee .

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