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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Rallies On Renewed OPEC Cut Hopes

whiting refinery

After a strong sell-off in recent days, option expiry combines with OPEC cut expectations to emphatically rally prices on this third Tuesday in November. Hark, here are five things to consider in oil markets today:

1) We said in the aftermath of the Algiers meeting that if an OPEC production cut were to be forthcoming, Saudi Arabia would have to do the heavy-lifting. A production cut still appears a likely scenario, as does some back-breaking work by Saudi.

With the OPEC meeting in Vienna in fifteen days, the cartel is entering the final stretch of diplomacy, via the medium of closed-door meetings. The situation for OPEC has only become more complicated since the end of September, however.

Libyan oil production is on the rise, exhibited via their increased exports both this month and last (hark, at 550,000 bpd so far in November, according to our ClipperData). And despite reports of a renewed surge in sabotage in Nigeria, export loadings have clambered above 2 million barrels per day so far in November. Exports for the two are up over 1mn bpd compared to September:

(Click to enlarge)

2) Rising OPEC production means that the cartel is going to have to dig even deeper in terms of production cuts. At the time of the Algiers meeting, the latest data showed OPEC producing 33.237mn bpd. Last week's November report from OPEC pegged production at 33.64mn bpd - a record.

This is reflected in the middle bar below; the cartel has to cut by at least 0.64mn bpd, or by 1.14mn bpd, depending upon the production target they choose (32.5mn bpd or 33mn bpd). Including a rebound in Angolan production (as well increasing flows from Libya and Nigeria, as highlighted above), the cartel is going to have to cut by an even larger amount.

(Click to enlarge)

3) The current sticking point for the cartel appears to be Iraq, and Iraq's discontent with both freezing their production, and the low estimate of their production by secondary sources. Saudi appears unwilling to waive Iraq's participation in the cuts - but may have to back down on this front if it wants a deal pushed through.

The reason Saudi Arabia has been willing to make a concession with Iranian production seems to lie with their belief that the Persian Gulf state is unable to increase materially from here. Iranian oil exports continue to climb, however - something we have highlighted in recent days. Iran's exports into Asia have now climbed to over 2.2mn bpd - way higher than their total exports at the start of the year:

(Click to enlarge)

4) The chart below is from a piece addressing the question as to whether low oil prices are good or bad for the economy. We discussed this a few months ago, driven by the statistic that consumption has been boosted by 0.61 percent due to higher discretionary income (h/t lower gasoline prices), while investment has dropped by 0.62 percent due to lower drilling activity.

With the overall U.S. economy having less economic dependence on oil - and less vulnerability to its price changes - the U.S. is less exposed than most, as the chart lower right shows. Nonetheless, as the stat above illustrates, the positives and negatives basically cancel each other out.

(Click to enlarge)

5) Finally, the below chart shows how the Permian Basin now has nearly as many active oil rigs as the rest of the United States combined (including offshore rigs too). The EIA attributes the increase in the Permian due to higher M&A activity, which in itself was bolstered by rising prices in Q2, as well as improving credit conditions - spurring on positive sentiment the upstream oil sector.

(Click to enlarge)

By Matt Smith

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  • Mark Taylor on November 15 2016 said:
    All of that adds up to more production, not a cut. This is a dream.

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