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OPEC Continues To Accelerate Output (Before Hitting The Brakes?)

Rig

Prices are trying to clamber higher today amid promises from OPEC that a production cut is on the cards, while battling against the gale-force headwinds of a stronger dollar. As oil infrastructure at Cushing, Oklahoma (the pipeline capital of the world!) appears to be virtually unscathed after a magnitude 5 earthquake last night, hark, here are five things to consider in oil markets today:

1) The Wall Street Journal published this piece in recent days, which uses our ClipperData to show how total global waterborne loadings have reached a record - in no small part due to increasing OPEC flows.

As the chart below illustrates, global loadings have been above year-ago levels for every month this year, with loadings last month up the most. The increase in global supply via waterborne loadings is far outpacing that of rising demand (loadings are up 1.8mn bpd year-on-year, well above demand growth of +1.2mn bpd).

As global producers pump and export more oil, the market is not moving any closer to balance.

(Click to enlarge)

2) The record volume of OPEC exports can be interpreted in one of two ways: that the cartel is being blissfully ignorant of curbing production.....or every producer is going pedal to the metal, at maximum velocity before having to hit the brakes at the end of the month.

Our gut instinct is that some type of deal will be forthcoming. The Saudis are clearly pushing for some type of action, and for the sake of its credibility - or what is left - the cartel cannot afford to keep crying wolf. Given Saudi's standing in the cartel, we believe there will be some further affirmation of a production target announced at the meeting.

Related: Fracking Under Fire: The Ballot Initiatives That Impact Oil & Gas

Nonetheless, the heavy lifting relating to any production cut will rest firmly on the shoulders of Saudi, while even if a collective agreement is reached, there is a low likelihood that production targets will be adhered to by every member. Hum dee dum.

3) The recent excessive volume of exports hitting the global market is being reflected in widening timespreads. The spread betwixt the Brent front month contract and the 12-month contract has ballooned in recent weeks, reflective of the onslaught of crude hitting the market.

The contango between the two contracts was shrinking throughout the first half of the year, as the market adjusted to the prospect of a balancing market. But as prices have rallied in the second half of the year, and as production has increased - from OPEC to Russia to the U.S. - the contango betwixt the two contracts has widened again, reaching a high for the year at over $5.50/bbl:

(Click to enlarge)

4) The below chart from EIA is interesting from two perspectives. Firstly, it highlights how prolific horizontally-drilled wells are (last year there were over 4,000 wells producing at least 400 bpd in the U.S.). Secondly, the graphic highlights how low oil prices abruptly capped the well count, halting its rampant rise since 2010 to 2014:

(Click to enlarge)

Related: Can Clean Energy Boost Global GDP?

5) Finally, the chart below highlights how the overall leverage of Big Oil has jumped to 8.5 percent in the last quarter, as it continues to raise debt in order to fund its dividends. As they increasingly struggle to cover capex and dividends from cash flow, companies are seemingly robbing Peter to pay Paul.

(Click to enlarge)

By Matt Smith

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