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Four Charts That Explain OPEC’s Fall From Power

Undeterred by earlier failures to jawbone the price of oil higher, a new barrage of headlines hit courtesy of Reuters reiterating more of the same, and adding a new spin. This time around, the oil production cut being considered will last nine not six months, continuing at least through the end of Q1 2018.

As Reuters adds, OPEC and non-member oil producers are considering extending a global supply cut for nine months or more to avoid a price-sapping output increase in the first quarter of next year, when demand is expected to be weak. OPEC countries including core Gulf members are discussing internally whether an extension of nine months or longer is needed to give the market more time to rebalance, the sources said. One industry source familiar with the talks said there had been discussions about extending curbs until the end of the first quarter of 2018, when crude demand should be seasonally weak.

"To increase production in those months may have a negative impact (on prices). So, we may ask for an extension until the end of Q1 of 2018," the source said.

In other words, it's desperation time for OPEC which is now throwing out every possible trial balloon to see what sticks with headline scanning algos and pushes the price of oil higher, if only temporarily.

An OPEC source told Reuters that other ideas and scenarios could be discussed, adding that core Gulf OPEC producers had talked about an extension beyond six months. Another OPEC source said it would be tough to get a consensus on prolonging curbs for more than six months but "anything can happen". A third source said an extension of up to one year could be an option.

This is in line with what we reported earlier this morning, when Saudi Energy Minister Khalid al-Falih said overnight that the OPEC-led production cut could be extended beyond 2017. "Based on consultations that I've had with participating members, I am confident the agreement will be extended into the second half of the year and possibly beyond," Falih said at an industry event in Kuala Lumpur. He was backed by Russian Energy Minister Alexander Novak who on Monday endorsed extending oil output curbs, saying it would help speed up a return to a healthier market.

There is just one problem, or rather four, as shown in the following four charts.

First, it is no longer a question merely of supply as demand has, in recent weeks, gone through a "soft patch", confirmed overnight when China recorded a decline in oil imports in April.

(Click to enlarge) Related: Oil Prices Are Where They Should Be

Second, the current rig count recovery in the U.S. is now the strongest in 30 years. Overnight, Goldman revised its forecast for U.S. production and now sees annual oil output in the U.S. increasing 285k b/d y/y on average in 2017. As a result, oil output is expected to rise 765k b/d between 4Q 2016 and 4Q 2017 across Permian, Eagle Ford, Bakken and Niobrara shale plays, and may approach an all-time high production level of 10mmpb.

(Click to enlarge)

As a result, U.S. producers are increasingly taking market share from OPEC as shown in the next chart.

(Click to enlarge)

Finally, as Morgan Stanley shows, all this has impacted the oil strip, and as a result without prospects for a tight 2018, the forward curve has moved to full contango.

(Click to enlarge)

Absent finding a way of shuttering a material portion of U.S. shale output, all current and future OPEC attempts to talk the price of oil higher will fail, unless Saudi Arabia is willing to shoulder even greater production cuts in a world where the consensus has become that roughly 2mmbpd has to be taken out of the supply side.

By ZeroHedge

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