OPEC+ Stabilizes Oil Markets

1. Deep capex cuts for shale

- A group of 33 U.S. shale companies cut capex to just $5.8 billion combined in the third quarter, according to a new report.

- That was down from $13.9 billion for the same period a year earlier, a 58% decline in spending

- The cut in spending allowed the group to post $2.6 billion in free cash flow for the third quarter, the best collective result ever.

- But the decent result may prove temporary. “[I]nvestors will likely see little reason to cheer in last quarter’s results. Shale wells quickly decline after an initial gush, so shale-focused companies must continually drill new wells to maintain production,” the authors of the report wrote. “The steep capex cuts over the last two quarters foretell dwindling oi land gas output in the future – suggesting that the U.S. shale sector has stopped investing in its own growth.”

2. China’s copper spending spree slows

- China’s November customs data shows a dip in imports for commodities, including copper.

- China imported 561,000 tons of copper last month, up 17% from year-ago levels, but down 9% from October.

- It was actually the second consecutive month of declining import volumes, and the lowest volume of copper imports since May. This is likely due to a sharp increase in prices, according to Commerzbank.

- As a result of the dip in imports, copper prices were sluggish this week.

3. OPEC+ agreement stabilized the market

- OPEC+ agreed to increase production by just 0.5 mb/d in January, and by 0.5 mb/d for each month through April, although they also said they would meet monthly to reassess. The deal headed off the scheduled increase of 2 mb/d beginning in January.

- Bank of America pointed to the futures curve as evidence that the agreement was successful. “The success of the renewed OPEC+ agreement is visible in the sharp rotation in the Brent oil forward curve, with long-dated crude oil prices falling again into the low end of the range even as spot prices continued to push higher,” the bank said.

- The bank argues that OPEC+ prefers to keep the shape of the futures curve in backwardation – near-term prices trading at a premium to longer-dated futures – because it drains inventories and also discourages U.S. shale. “This week's agreement very much points in this direction and places OPEC+ actions on the driving seat for oil prices into 2021,” Bank of America said.

- Still, within the OPEC+ group, there are disagreements and tension. Maintaining compliance will be trickier with a moving monthly target and the desire from governments to increase production because of budgetary pressure.

4. Historic inventories will take a long time to drain

- While the OPEC+ agreement will go a long way to maintaining market stability and allowing crude prices to hold onto their gains, there is a major hurdle standing in the way of a stronger rally.

- Even as the oil market has dipped into a modest supply deficit at times in recent months, it will take a long time to drain away the record buildup in crude stocks. At over 3.1 billion barrels, global onshore crude storage is still more than 200 million barrels higher than it was at the onset of the pandemic.

- But neither does OPEC+ want to drain inventories too quickly, as it would likely push prices up to a point that U.S. shale may trigger a restart.

- “So OPEC's oil inventory management strategy needs to be balanced against its broader market share strategy,” Bank of America said.

5. U.S. crude stocks surge

- Oil prices rose this week, with Brent touching $50 per barrel for the first time since March. The beginning of vaccinations in the UK and elsewhere has bolstered optimism.

- But there is a tension at play with soaring crude inventories. “It is not every day that the market ignores weekly builds of US crude inventories, and the latest one was of a significant size as well,” Rystad Energy’s Head of Oil Markets Bjornar Tonhaugen, said in a statement. “Seeing prices moving up again today over $49 is a clear indication of the increasing market confidence towards vaccine campaigns.”

- U.S. crude inventories rose by 15.2 million barrels last week, dramatically higher than expected.

- Demand in China and India looks strong, even as demand in the U.S. has deteriorated.

- Other analysts also questioned the rally. “It seems that cheap money, good sentiment on the stock market and hopes that demand will soon normalize thanks to corona vaccines count for more than the reality,” Commerzbank wrote in a report.

6. Platinum prices rally on vaccine rollout, but supply surge poses price risks

- Gold prices have crashed in the past few weeks in the wake of very exciting vaccine news. Platinum, on the other hand, has rallied.

- Platinum surpassed $1,000/oz on December 1, hitting a threshold last reached in 2016.

- “The issue is whether higher prices reflect anticipation of an undersupplied market in 2021, or whether the run-up has been premature,” Standard Chartered analysts wrote in a note.

- The investment bank sees a modest supply surplus in 2021, as supply comes back online in South Africa, offsetting a demand rebound from the auto industry.

- “Therefore, we expect prices to soften before a sustained move above USD 1,000/oz, supported by an undersupplied market longer-term,” the bank said.

7. U.S. refining capacity drops to lowest level since 2016

- The U.S. had 18.4 mb/d of refining capacity as of September 1, according to the EIA.

- That was down from 19 mb/d reached earlier this year, which was a record high at the time.

- The pandemic and the collapse of demand have put the squeeze on refiners, and older and relatively simple refineries in the U.S. have shut down, a trend that is also unfolding in Europe.

- For example, Marathon (NYSE: MPC) chose to shutter its Dickinson, North Dakota refinery and convert it into renewable diesel.

- Other closures have occurred in California, Wyoming, and New Mexico.