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Oil Cutbacks Coming, But More Supply in the Works

Friday, December 11, 2015

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’s Spare Capacity

- OPEC still has room to ramp up production
- Iran is expected to bring 0.5 million barrels per day (mb/d) to 1 mb/d next year.
- Saudi Arabia has 2 mb/d to work with, although it’s highly unlikely it will drawdown a large portion of that.
- In fact Saudi Arabia’s 2 mb/d is historically low. OPEC had more than 6 mb/d in spare capacity in 2002 for example.
- Libya’s figures are not counted in the chart above. Although widespread violence and an ongoing political and security crisis will prevent full restoration of its potential, Libya still has over 1 mb/d in unused oil potential. Some of that could come back if one or both of the rival government factions can manage to open up oil export terminals.
- In the near-term, OPEC could add more crude to the oversupplied market. Iran, Saudi Arabia, Iraq, and Libya all could chip in to raise global supplies.

2. Oil prices track speculative movements 

- Oil prices tend to move with the speculative movements of oil traders. When speculators bet oil prices will rise, there is upward pressure on prices, and vice versa.

- Of course, speculators stake out positions based on a variety of factors, ostensibly due to underlying fundamental data.
- But that isn’t always the case. Fundamentals change slowly, but oil prices are volatile. That is because speculators are fickle, and can move prices quickly when the “herd” feels a change in sentiment.
- Lately, oil traders have staked out some of the most pessimistic (i.e. net-short) positions in several years.
- Around 300 million barrels of net-short positions have been taken, including Brent. That pushes down oil prices. However, as we noted last week, amassing such a position tends to provoke “short-covering,” so prices could snap back once sentiment changes. Sometimes the catalyst can be a small piece of economic data, such as a manufacturing report, or job increases.

3. China is a drag

- The crash in oil prices since 2014 is largely a supply-side phenomenon. U.S. shale flooded…




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