OPEC’s new deal: Fudgy math or fuzzy stats?

The deed is done and not a single Iranian appeared visibly riled in the end. Following the conclusion of OPEC's 174th Ministerial Meeting on Friday here in Vienna, Austria, the cartel announced a 'nominal' production hike of 1 million barrels per day (bpd).

But the futures market expected more and has gone into full bullish mode as the weekend approaches. At 18:32pm BST on Friday, the WTI front-month futures contract was at $68.77, up $3.23 or +4.93% and Brent was at $74.88, up $1.83 or +2.51%.

Both benchmarks more than recovered their overnight declines, as traders who – like the Oilholic – delved into the OPEC statement, encountered some real fudgy math or perhaps fuzzy stats. It seems all what OPEC has done is "insist" on 100% compliance with a 1.2 million barrels per day (bpd) cut it put forward in November 2016. 

The cartel's claim is that some of its members 'overcut' due to their own enthusiasm, or due to circumstances, geopolitics or lack of investment (Latter cases to be read as Libya, Nigeria and Venezuela). 

According to OPEC, this meant that compliance with the cuts touched 152% in May, instead of 100% or 1.824 million bpd. So now all OPEC has asked its members to do is bring compliance down to 100%, or put 624,000 barrels back on to the market and not a million! 

Of course, as has become the norm for over a decade now, OPEC did not reveal which individual member will do what and who is or isn't partaking in the exercise. That's the compromise to keep Iran onside for the moment. Here is one's Forbes piece for a more detailed perspective; but it is a jolly old fudge here at Helferstorferstrasse 17.

And oh, by the way, Congo's request to join OPEC has been accepted. So, if there's an OPEC-Plus or a Super-OPEC, it'll have 25 members to begin with. That's all from Vienna for the moment folks! More tomorrow when OPEC chats to its 10 non-OPEC counterparts.Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2018. Photo: Opec Secretariat, Vienna, Austria © Gaurav Sharma 2018

Views from Wall Street on oil market volatility

The Oilholic finds himself 3,460 miles away from London in New York, with Wall Street giving the crude market yet another reality check. In the last few months, money managers of all description, not just our friends in the hedge fund business, are scratching their heads having first seen a technical bear market in July, only for it to turn in favour of a technical bull market in August!

But now, with all that phoney talk of producers coming together to freeze oil production having fallen by the wayside, both Brent and WTI have started slipping again. 

Not one Wall Streeter the Oilholic has spoken to since arriving in the Big Apple seems to discount the theory that oil may be no higher than $50 per barrel come Christmas, and even that might be a stretch. 

In a desperate bid to keep the market interested in the production freeze nonsense, the Saudis and Russians pledged cooperation ensuring "oil market stability" at no less august a venue than the G20 summit in China earlier this month. Of course, as no clear direction was provided on how that "stability" might actually be achieved and nothing revealed by way of production alterations or caps, not many are quite literally buying it – not on Wall Street, not in the City of London.

Forget the shorts, even the longs brigade have realised that unless both the Saudis and Russians, who between them are pumping over 20 million barrels per day (bpd) of oil, announce a highly unlikely real terms cut of somewhere in the region of 1 to 1.5 million bpd at the producers’ informal shindig on the sidelines of International Energy Forum (due 26-28 September) in Algiers, price support would be thin on the ground.

In fact, even a real terms cut would only provide short-lived support of somewhere in the region of $5-10 per barrel. As a side effect, this temporary reprieve would boost fringe non-OPEC production that is currently struggling with a sub $50 oil price. Furthermore, North American shale production, which is proving quite resilient with price fluctuations in the $40-50 range, is going to go up a level and supply scenarios would revert to the norm within a matter of months.

A number of oil producers would substitute the hypothetical 1-1.5 million bpd Riyadh and Moscow could potentially sacrifice. That’s precisely why Wall Street is betting on the fact that neither countries would relent, for among other things – both are also competing against each other for market.

Another added complication is the uncertainty over oil demand growth, which remains shaky and is not quite what it used to be. Morgan Stanley and Barclays are among a rising number of players who think 2016 might well end-up with demand growth in the region of 625,000 to 850,000 bpd, well shy of market think-tank projections of 1.3 million bpd.

Trading bets are mirroring those market concerns. Money managers sharply decreased their overall bullish bets in WTI futures for the week to September 6th, and also reduced their net position for a second straight week, according to Commodity Futures Trading Commission (CFTC) data.

In numeric terms - "Non-commercial contracts" of crude oil futures, to be mostly read as those traded by paper speculators, totalled a net position of +285,795 contracts. That’s a change of -55,493 contracts from the previous week’s total of +341,288; the net contracts for the data reported through August 30th.

The speculative oil bets decline also dragged the net position below the +300,000 level for the first time in nearly a month. That’s all for the moment from New York folks, as the Oilholic leaves you with a view of Times Square! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo 1: Wall Street & New York Stock Exchange, USA. Photo 2: Times Square, New York, USA © Gaurav Sharma, September 2016

Grappling with volatility in a barmy crude market

The oil market is not making a whole lot of sense at present to a whole lot of people; the Oilholic is admittedly one of them. However, wherever you apportion the blame for the current market volatility, do not take the convenient route of laying it all at China’s doorstep. That would be oversimplification!

It is safe to say this blogger hasn’t seen anything quite as barmy over the last decade, not even during the post Lehman Brothers kerfuffle as a US financial crisis morphed into a global one. That was in the main a crisis of demand, what’s afoot is one triggered first and foremost by oversupply. 

As one noted in a recent Forbes column, the oversupply situation – not just for oil but a whole host of commodities – merits a deeper examination. The week before we saw oil benchmarks plummet after the so-called ‘Black Monday’ (August 24) only for it recover by Friday and end higher on a week-over-week basis compared to the previous week’s close (see graph above, click to enlarge)

This was followed on Monday, August 31 by some hefty gains of over 8% for both Brent and WTI. Yet at the time of writing this blog post some 48 hours later, Brent had shed over 10% and the WTI over 7% on Tuesday but again gained 1.72% and 1.39% respectively on Wednesday.

The reasons for driving prices down were about as fickle as they were for driving them up and subsequently pulling them down again, and so it goes. When the US Energy Information Administration (EIA) reported on Monday that the country’s oil production peaked at just above 9.6 million barrels per day (bpd) in April, before falling by more than 300,000 bpd over the following two months; those in favour of short-calling saw a window to really go for it.

They also drew in some vague OPEC comment (about wanting to support the price in tandem with other producers), knowing full well that the phoney rally would correct. The very next day, as the official purchasing managers’ index for Chinese manufacturing activity fell to 49.7 in August, from the previous month’s reading of 50, some serious profit-taking began.

As a figure below 50 signals a contraction, while a level above that indicates expansion, traders found the perfect pretext to drive the price lower. Calling the price higher based on back-dated US data on lower production in a heavily oversupplied market is about as valid as driving the price lower based on China’s manufacturing PMI data indicative of a minor contraction in activity. The Oilholic reckons it wasn’t about either but nervous markets and naked opportunism; bywords of an oversupplied market.

So at the risk of sounding like a broken record, this blogger again points out – oversupply to the tune of 1.1-1.3 million bpd has not altered. China’s import level has largely averaged 7 million bpd for much of the year so far, except May. 

Yours truly is still sticking to the line of an end of year Brent price of $60 per barrel with a gradual supply correction on the cards over the remaining months of 2015 with an upside risk. Chances of Iran imminently flooding the market are about as likely as US shale oil witnessing a dramatic decline to an extent some in OPEC continue to dream off.

But to get an outside perspective, analysts at HSBC also agree it may take some time for the market to rebalance fully. “The current price levels look completely unsustainable to us and a combination of OPEC economics and marginal costs of production point to longer-term prices being significantly higher,” they wrote in a note to clients.

The bank is now assuming a Brent average of $55.4 per barrel in 2015, rising to $60 in 2016 and $70-80 for 2017/18. Barclays and Deutsche Bank analysts also have broadly similar forecasts, as does Moody’s for its ratings purposes.

The ratings agency sees a target price of $75 achieved by the turn of the decade, but for yours truly that moment is bound to arrive sooner. In the meantime, make daily calls based on the newsflow in this barmy market. That’s all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Jan 2 to Aug 28, 2015 © Gaurav Sharma, August 2015.

Crude take: $60 Brent price is (still) about right

Does the Iranian nuclear settlement make a $60 per barrel Brent price seem too optimistic as a median level for the current year - that's the question on most oil market observers' minds. Even before delving into City chatter, the Oilholic believes the answer to that question in a word is ‘no’.

For starters, the settlement which had been on the cards, has already been priced in to a certain extent despite an element of unpredictability. Secondly, as yours truly noted in a Forbes column - it will take better parts of 12 months for Iran to add anywhere near 400,000 barrels per day (bpd), and some 18 months to ramp up production to 500,000 bpd.

Following news of the agreement, Fitch Ratings noted that details of the condition of Iran's production infrastructure might well be sketchy, but with limited levels of investment, it is likely that only a portion of previous capacity can be brought back onstream without further material reinvestment. 

“We would expect to see some increases in production throughout the course of 2016 but that this would be much less than half of the full 1.4 million bpd that was lost,” said Alex Griffiths, Managing Director at the ratings agency.

“It will require significant investment and expertise - for which Iran is likely to want to partner with international oil companies. These projects typically take many months to agree, as oil companies and governments manoeuvre for the best terms, and often years to implement.”

Thirdly, it is also questionable whether Tehran actually wants to take the self-defeating step of ‘flooding’ the market even if it could. The 40 million or so barrels said to be held in storage by the country are likely to be released gradually to get the maximum value for Tehran’s holdings. Fourthly, the market is betting on an uptick in demand from Asia despite China's recent woes. The potential uptick wont send oil producers' pulses racing but would provide some pricing comfort to the upside.

Finally, IEA and others, while not forecasting a massive decline, are factoring in lower non-OPEC oil production over the fourth quarter of this year. Collectively, all of this is likely to provide support to the upside. The Oilholic’s forward projection is that Brent could flirt with $70 on the right side of Christmas, but the median for 2015 is now likely to come in somewhere between $60-$62.5. 

Yet many don’t agree, despite the oil price returning to largely where it was actually within the same session's trading itself on day of the Iran announcement. For instance, analysts at Bank of America Merrill Lynch still feel Iran could potentially raise production back up by 700,000 bpd over the next 12 months, adding downside pressure on forward oil prices of $5-$10 per barrel. 

On the other hand, analysts at Barclays don't quite view it that way and the Oilholic concurs. Like Fitch, the bank’s team neither see a huge short-term uptick in production volumes nor the oil price moving “markedly lower” from here as a result of the Iranian agreement.

“We believe that the market will begin to adjust, whether through higher demand, or lower non-OPEC supply in the next couple years but only once Iran’s contribution and timing are made clear. For now, OPEC is already producing well above the demand for its crude, and this makes it worse,” Barclays analysts wrote to their clients. 

“We do not expect the Saudis to do anything markedly different. Rather, they will take a wait and see approach.”

One thing is for sure, lower oil prices early on in the third quarter would have as detrimental an effect on the quarterly median, as early January prices did on the first quarter median (see above right, click to enlarge). End result is quite likely to ensure the year-end average would be in the lower $60s. That's all for the moment folks! Keep reading, keep it 'crude'!

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