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The OPEC Deal Looks Destined To Fail


Friday June 9, 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. Inventories decline…and rise again

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- The key objective for OPEC at this point is to drain crude oil inventories around the world, and particularly in the United States.

- The EIA offered a damning projection this week, predicting stock drawdowns of just 200,000 barrels per day on average in 2017, which will be painfully slow and wholly inadequate for correcting imbalances.

- Worse, the EIA sees inventories actually rising once again in 2018.

- The culprit is growing non-OPEC production – that is, surging U.S. shale output but also new supply from places like Canada and Brazil.

- The EIA forecasts Brent prices of $54 per barrel in the third quarter.

- Of course, the prediction that inventories will surge in the second quarter of 2018 is based on the assumption that the OPEC deal will expire. As it stands, that is exactly what will happen, but OPEC could always extend the deal again.

2. EV sales surge

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- The cumulative number of EV sales has surpassed 2 million last year, according to the IEA, up from nearly zero as recently as five years ago.

- Global EV sales jumped by 60 percent in 2016, although they still only make up about 0.2 percent of the auto market.

- China is the undisputed leader right now, accounting for 40 percent of global EV sales, according to the IEA.

- Despite the surge in sales, the EV market is “largely influenced by the policy environment.”

3. Nigeria to add new supply

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- Royal Dutch Shell (NYSE: RDS.A) lifted its force majeure on its Forcados crude oil stream this week, a move that could send a chill through the oil markets.

- Forcados, Nigeria’s largest source of crude oil, has been offline for more than a year after being disrupted by militant attacks. The return of the pipeline and export terminal could see 200,000 to 250,000 bpd added to the global oil market.

- The additional supply is equivalent to about one-fifth of OPEC’s 1.2 mb/d of cuts.

- Nigeria is compliance OPEC’s collective efforts, pushing compliance down to just 66 percent.

4. Iraqi oil exports to U.S. surge

- Saudi Arabia’s new strategy to drain global oil inventories is centered around slashing exports to the U.S.

- But as Saudi backs away from the U.S. market, Iraq is stepping into the void.

- Iraq’s oil exports to the U.S. jumped to the most in five years for the week ending on June 2.

- The U.S. imported 1.14 mb/d of Iraqi oil during that week, nearly quadruple the previous week’s total of just 293,000 bpd.

- One data point does not necessarily point to a trend, but Saudi Arabia’s strategy of draining U.S. inventories will be a struggle if Iraq steps up exports.

5. WTI discount to Brent narrows

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- Brent has consistently traded at a premium to WTI prices, particularly before the U.S. crude oil export ban was lifted in 2015, which trapped U.S. oil.

- But the WTI discount to Brent narrowed in May, from nearly $3 per barrel to less than $2.

- The smaller discount reduces the competitiveness of U.S. exports and leads to more U.S. imports of relatively cheaper oil from abroad (linked to Brent prices).

- The discount could narrow further with Nigeria set to bring new supplies back online.

- The narrowing discount led to a surprise uptick in U.S. inventories, both for crude oil and gasoline. The latest EIA data showed a jump of 3.3 million barrels for crude stocks and also 3.3 million barrels for gasoline inventories.

6. Fracklog is growing

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- The number of drilled but uncompleted wells (DUCs) has increased sharply this year, a sign that drillers are picking up activity, but not completing their wells.

- The DUC backlog has jumped the most in the Permian Basin, rising by more than 30 percent to 1,995 wells.

- In the past, the reason for the rising number of DUCs was because companies were drilling but waiting to complete wells in the hopes of higher prices.

- But these days, the DUC increase is being attributed to bottlenecks. A shortage of fracking crews in West Texas in particular is a source of troubles for the industry.

- The inability to find enough fracking crews could increase costs for oil companies and hobble production growth. In short, the rising number of DUCs could be a sign that the surge in shale production might slow down, or at least be delayed.

7. Gas market finally goes global

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- For decades, there was no such thing as a global gas market. Unlike crude oil, natural gas is traded in very separate regional markets.

- But that has changed with the surge in LNG export capacity and new cheap supplies from places like the U.S. The gas trade is going through a radical transformation, upending longstanding practices.

- LNG has traditionally been traded through long-term contracts with fixed terms based on the price of crude oil. But now, there is a rapidly growing spot market.

- The result is a narrowing of different regional prices, with markets converging close to one prevailing global price.

- LNG is quickly becoming a liquid (no pun intended), well-supplied, global market with prices responsive to changing market conditions rather than fixed terms.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.

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