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OPEC Is Driving Prices Up, But Where Is The Limit?

Rigs

Friday May 19, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. OPEC extension flattens futures curve

(Click to enlarge)

- OPEC is on the verge of extending its production cuts for another nine months, a move intended to drain high levels of oil inventories.
- In order to do that, OPEC is taking aim at the oil futures curve, hopping to flatten it out and ultimately push longer-dated futures lower than the spot price or front-month oil price.
- The idea is that storage then becomes uneconomical, forcing traders to drain inventories.
- More importantly, it could hamper shale production since shale companies would not be able to hedge their production a year or two out. Also, executives would hold back on drilling if they expected oil prices to fall in the future.
- That is the key for OPEC to balance the oil market. The futures curve flattened quite a bit after the announcement from Saudi Arabia and Russia that they were seeking a nine-month extension.

2. OPEC’s deal to drain inventories

(Click to enlarge)

- If extended for nine months, the OPEC/non-OPEC cuts will probably be enough to drain inventories back to average levels by the end of the first quarter…

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