OPEC, formally meeting in Vienna Friday, is almost certain to raise production in a market that is very different from the end of 2015, the start of a period of cutbacks that has brought the market to its current level.
The graph below tells the story: from an enormous surplus of oil in inventory a few years ago, that surplus relative to the five-year average of world petroleum stocks is now gone. And that’s why OPEC is expected to add barrels to the market in its OPEC meeting.
The disappearing surplus has been driven primarily by three factors:
- Global world demand between 2016 and this year is likely to be up 3 million b/d, to just less than 100 million b/d for the average in 2018. Those are healthy growth rates, at percentages stronger than in recent years, and have been pushed along by global economic growth.
- The end-2015 pact among OPEC and non-OPEC nations that sought to take 1.8 million b/d of supply off the market, in response to growing U.S. shale oil production. By any measure, it has been successful in its stated goal.
- A series of unplanned reductions in output in various countries around the world, led by Venezuela, which has seen its economic chaos finally catch up to its oil sector. Its production of a little more than 1 million b/d is down about 50% from just a few years ago with no reversal or even stabilization in sight.
Add that all up and the glut of 2015-2016 is just a distant memory. That glut has disappeared even as the U.S. oil boom continues. The last full month figures from the Department of Energy showed U.S. output of 10.474 million b/d in March. The weekly numbers–always subject to revision, but still an indicator of direction–were 10.9 million b/d in the most recent report.
Ten years ago in June 2008, it was about 5.1 million b/d.
“I know ministers are going into the meeting with widely different position on what ought to be done,” Vandana Hari, owner and founder of the Singapore-based oil consultancy Vanda Insights, told FreightWaves. “I do think reason will prevail.”
The range of increases in OPEC and non-OPEC output being discussed–most of the non-OPEC cuts are being borne by Russia–start at 300,000 b/d on the small side and range up to 1.5 million b/d/ “I would rule out 1.5 and I would equally rule out 300,000,” she said.
Goldman Sachs, noted as an industry bull in recent months (and especially 10 years ago, before the runup to all-time highs), said in a report earlier this week that it expects an increase in output of 1 million b/d between Russia and OPEC. But given the problems and turmoil in other countries, the impact of that is going to be limited, Goldman Sachs said. “(D)eclines among other participants to the cuts leave production up only (450,000 b/d) from 2Q18,” it said. “On the demand side, we still forecast above-consensus demand growth of 1.75 mb/d yoy in 2018, as the largest (emerging market) and (developing market) consumers continue to exhibit the strongest growth. “
Still, with the anticipation building in recent weeks that there would be some sort of deal in Vienna, and with the fact that the U.S. oil patch continues to surge, prices have dropped. The U.S. benchmark WTI price settled Wednesday at $64.64/b, down from a May 21 peak settlement of $72.57. The world benchmark Brent price dropped to $73.34 from $79.59, while New York harbor diesel–the product traded on the Chicago Mercantile Exchange’s NYMEX division–declined to a Wednesday settlement of $2.0786/gal from $2.2746/gal at its May 17 peak. What this means is that while WTI has declined 8.6% from its peak, New York harbor diesel–whose price becomes the basis for retail diesel–is down almost 11%.
The anticipation of a deal pushed prices down even further in early trade Thursday, as much as $1.56 in the case of Brent and about $1 for WTI. Reuters reported that Saudi Arabian Energy Minister Khalid al-Falih told reporters in Vienna: “We need to release supply to the market.”
Beyond the problems in Venezuela, Hari listed a range of countries suffering from one degree or another of unplanned outages: Angola, Mexico, Azerbaijan, Kazakstan and Libya (which regularly jerks up and down wildly since the fall of the Gaddafi regime). She also cited the “looming U.S. oil sanctions on Iran,” and the uncertain impact that will have on Iranian output.
Particularly notable is that the price of WTI where it’s produced–Texas’ Permian Basin–is almost $20 less than Brent, while WTI at the CME delivery point of Cushing, Oklahoma is about $9 less. Hari said the Permian continues to suffer from all sorts of shortages–crude pipelines to take the crude to markets in the Midcontinent and the U.S. Gulf, and many types of workers (including truck drivers). Note the reference in this story from the Dallas Morning News as to the market in the Permian for those carrying a Commercial Driver’s License.