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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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Potential OPEC Cut? It Depends On Non-OPEC Nations Now

Eighty-five years after the birth of French filmmaker Jean-Luc Godard, and the crude complex is acting suitably surreal today. As expected, rhetoric is ratcheting up out of Vienna ahead of tomorrow’s OPEC meeting, with the crude market shaken up like a snowglobe.

Today’s quote of the day is from an unnamed delegate in Vienna, who has summed up the situation pretty much perfectly: ‘In order for there to be a cut in production non-OPEC must participate, Iraq has to participate and the Iran output picture has to be clear’, the delegate said.

Hence the reason why no cut will be forthcoming; Saudi says it is willing to cut production if its cartel cohorts – Iraq, Iran, et al – are willing to do so, as well as key non-OPEC producers such as Russia and Mexico. This is because Saudi knows full well these nations are unwilling to cut production – we have already been told us as much by them.

From one OPEC-focused tidbit to another, and Saudi Arabia has announced its OSP (official selling price) for January, further discounting Arab Light into Asia by $1.40 a barrel (versus the Oman/Dubai average), 10 cents more than December’s discount. It also cut its January Arab Light OSP to the US by $0.30 a barrel, but raised it to Northwest Europe by $0.50.

As our #ClipperData show below, the U.S. has imported just over one million barrels per day from Saudi Arabia this year, of which Arab Light is basically half of that volume. Imports from Saudi are averaging 20% less in 2015 than last year, although Arab Light imports have dropped at a lesser pace. Nonetheless, as US production slows and Saudi OSPs are cut, more oil has found its way to US shores in recent months: Related: Saudis Prepared To Listen At OPEC Meeting

 

Saudi Arabia crude imports to US (source: ClipperData, Datamyne)

Another interesting OPEC-related tidbit comes in the form of drilling activity. Oil rigs are being idled across Latin American nations such as Columbia and Mexico, where 57% and 42% of rigs have been idled this year, respectively. In Venezuela, however, the rig count is rising, up 19% this year, as the OPEC member tries to slow a decline in production: Related: Undeterred By Global Glut, U.S. Pushes Ahead On LNG Exports

In terms of overnight economic data, we have seen the China Caixin services PMI come in well below consensus (53.1), but still showing expansion (at 51.2). For an economy which is shifting away from being driven by industry and exports, and towards being driven by domestic demand, we need to see the service sector picking up the slack as industrial production continues to slow.

The rippling effect of a slowing Chinese economy continues to cripple Brazil, as it is their largest trade partner. Industrial production year-over-year in Brazil has dropped to -11.2% in October, the lowest level since May 2009 (think: belly of the Great Recession). Related: Are OPEC Countries Creditworthy At $50 Crude?

Brazil industrial production, YoY % (source: investing.com)

From one sign of worry to another, the Eurozone services PMI also came in weaker than expected, as did retail sales (negative for a second consecutive month). Meanwhile, the European Central Bank has pushed the deposit facility rate (aka, bank rates for overnight deposits) further into negative territory to -0.30% in an effort to stoke inflation, while extending quantitative easing for another six months – keeping purchases at 60 billion euros per month through until March 2017.

Mr. Market has responded emphatically to this announcement, and the euro is rallying like an absolute mad thing, in a bad-is-good kind-of-way. Correspondingly, the crude complex is being propelled higher as the US dollar softens; there are plenty more shakes left in the tail for today’s crude price action it would seem.

By Matt Smith

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