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With OPEC's September meeting in Algiers approaching quickly, the likelihood of a production freeze remains slim. Firstly, Iran has stated in the past its intent on regaining market share to pre-sanction levels, which suggests Iran will likely not agree to a production freeze in September. According to Iran, the country is now producing roughly 3.85 million barrels per day, which is still below its pre-sanction levels of 4.6 million barrels per day, As we have seen in the past, if Iran does not agree to a production freeze, than neither will Saudi Arabia its largest competitor in the region. Secondly, oil's supply and demand dynamics globally seem to be moving towards balance even without the intervention of OPEC. Notably, the futures curve (spread) is also tightening regardless of a production freeze, suggesting that OPEC members can continue to produce at record levels without drastically impacting the oil market. Accordingly, it is very plausible that oil could trade at more than $50 a barrel by the end of 2016 even without a freeze as markets continue to balance. Interestingly, Saudi Arabia boosted July output to a record 10.67 million barrels per day, suggesting it is clearly not concerned with limiting its own production. Overall, it would appear that both Iran and Saudi Arabia are content to allow market forces determine the oil price, much to the chagrin of smaller OPEC nations and non-OPEC producers. In the very unlikely event that OPEC members agree to a production freeze in September, this would most certainly speed up the process of re balancing the oil market.
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According to the latest IEA Oil Market Report, Saudi Arabia continued to produce at record highs in July, as high cost U.S. shale producers continue to struggle. Notably, OPEC crude oil output rose by 150 kb/d to 33.39 mb/d in July as Saudi Arabia pushed output to the highest ever and Iraq pumped more oil. Strong Middle East production lifted total OPEC crude supply 680 kb/d y/y and held output at an eight-year high. Overall, global oil supply rose by 0.8 mb/d in July, as both OPEC and non-OPEC production increased. Interestingly, output was 215 kb/d lower than a year earlier, as declines from non-OPEC (mainly U.S. producers) more than offset an 840 kb/d annual gain in total OPEC liquids. Non-OPEC production is forecast to drop by 0.9 mb/d this year before rebounding by 0.3 mb/d in 2017. Considering Saudi Arabia's uniquely low break-even price for oil, this has effectively allowed the country to continue pumping at unprecedented rates (as evidenced by the IEA's recent Oil Market Report). This approach preserves Saudi Arabia's leadership position in determining global production and price and cuts into the oil revenue of Iran, Saudi's top regional foe — all without seeming to pose any kind of long-term threat to the country's bottom line. Further, Saudi Arabia has also expressed in the past that it clearly believes that it's necessary to shut down the cartel’s biggest rivals in Russia and the shale oil fields of North Dakota. If victorious (which seems inevitable at this point), Saudi Arabia will emerge stronger after re-asserting its global significance as the custodian of the world’s primary energy source.
With WTI posting its worst monthly decline since July 2015, investors should be looking at the current market as a potential buying opportunity. Recall that crude oil hit a 2016 high of $51.67 on June 9th, but has since fallen nearly 20%. Despite fears that the commodity could retest the mid-$30 range, oil market fundamentals have not significantly changed and oil is likely heading much higher in the coming months and years. The most recent data point that has negatively impacted oil prices is high Gasoline inventories, which the EIA reported are at their highest levels since at least 1990. Notably, higher oil prices have spurred more crude and refined product output, which is now worrying the market. Fuel stockpiles across the world are high as refineries have churned out large volumes of diesel, gasoline and jet fuel, squeezing refining margins as demand lagged supply. That said, the recent increase in fuel stockpiles is also somewhat seasonal as the U.S. typically loses 1.5 - 2 million b/d of crude oil demand from refiners in the summer months (likely even more due to weak refining margins). Overall, the global crude oil supply/demand picture continues to tighten (albeit a slightly slower pace than originally thought), so once refinery demand picks up again into the Fall/Winter months, WTI could still be heading to $50 by year-end. Accordingly, the current seasonal dip in the WTI price could represent a interesting buying opportunity for energy investors willing to take the risk.
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Jason SawatzkyA Canadian Energy expert Archives
October 2020
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