Latest Market Commentary

December 1, 2016

 

 

Give OPEC credit, they were able to pull off a historic production-capping agreement. I did not think they could get it done. The details of this agreement are still being analyzed. Some suggest there could be some fuzzy math used to get to the approved production cuts. The bottom line is if OPEC and non-OPEC members can work to scale back production as they have agreed, supply and demand will begin to re-balance at a faster pace.

OPEC agreed to cut crude oil output by 1.2 million barrels per day to 32.5 million bpd starting January 1, 2017. The agreement to cap production will run for six months with the potential for it to be extended another six months after a review. As has been the case in the past, Saudi Arabia will provide most of the cuts (roughly about half) but, they managed to get the deal done and not look as if they gave in.

Indonesia, which is a net oil importer, was part of the group that is supposed to cut production by 4.5%. Since Indonesia imports oil, it could not accept these terms and suspended its membership in OPEC for the time being.

OPEC has also linked this production cut to about 600,000 bpd from non-OPEC members with Russia being the biggest one. Russia said it will gradually cut production up to 300,000 bpd. Russia will make its cuts slowly to ensure OPEC members are doing as agreed before it jumps in full bore.

Nigeria and Libya were excluded from the cuts and if they continue to ramp up their production it will impact the number of barrels that get cut by other OPEC members. Those situations are fluid and these countries continually face challenges.

At this point, OPEC looks committed enough to follow through with the agreement. In a perfect situation, it is fair to say total stocks would be flat in the first half of 2017 and then begin to draw down more significantly in the second half of 2017.

Yesterday and today’s strong rallies has been impacted by hedge fund buying the market to cover short positions. At some point the market will need a rest and a pullback, but for now the bulls in the are certainly in the driver’s seat.

The DOE inventory report had crude oil stocks down 900,000 barrels. Crude stocks at Cushing were up 2.4 million barrels. Gasoline stocks were up 2.1 million barrels and distillates were up 5.0 million barrels. Gasoline implied demand was up 57,000 bpd last week, but is only up 0.1% on a 4-week average versus last year. Distillate demand was fell by 280,000 bpd last week, but remains 4.1% higher on a 4-week average basis very last year.

U.S. crude oil production rose by 9,000 bpd up to a total of 8.699 million bpd. Alaska production rose by 11,000 bpd and the lower 48 states fell by 2,000 bpd.

There will be plenty of OPEC production cut discussions in the following days and week and the debate about whether higher crude oil prices will bring U.S. shale production back and if so, how quickly. For now, the bulls will rally this market all they can and keep it supported. Now that both Brent and WTI crude oil are over $50 dollars per barrel, it will be interesting to see if this level can become the new support level. 

Tim Danze, MFA Oil Company Hedging Manager