Updates
January 19, 2017: wow, talk about a country in disarray -- now
the Saudi energy minister suggests there may be need for another production cut in 2017.
Later, 3:42 p.m. Central Time: be sure to read the first comment about Saudi's seasonal production before reading the original post.
Original Note
We didn't get a chance to discuss the announcement that the Saudis recently made,
from Bloomberg:
- comments made by Saudi Arabia Energy Minister, as paraphrased by Bloomberg
- OPEC probably won’t need to extend a deal it reached with other crude
producers to cut output, given compliance with the reductions and the
outlook for an increase in global demand
- the re-balancing of the oil market should take place by the end of the first half of the year
- demand will pick up in the summer, and OPEC wants to make sure markets are well-supplied
- direct quote, though: "Of course, there are many variables that can come into play between now and June, and at that time we will be able to reassess.”
The original goal: to reduce global inventory by about 1.8 million bbls / day.
There are indications that some OPEC, and some non-OPEC countries, are cutting even more than agreed (not necessarily because they actually wanted to).
Some comments / observations:
1. If we take this at face value, it suggests the energy minister is simply looking at summer driving gasoline demand in the US:
1a. See the crack cocaine analogy at this post.
1b. If that is accurate, it suggests the energy minister feels the US shale industry can't meet the summer driving demand. The EIA seems to suggest otherwise (link to follow, if I remember). In January, 2017, US crude oil production rose slightly more than 40,000 bopd, month-over-month; the EIA projects a 71,000 bopd increase in February. I assume they mean 71,000 bbls over the previous month's rise of 41,000 bopd but I could be wrong. But if so, that represents about a 110,000-bbl increase, during the winter, and in the very early days of increased production.
[Added later, see first comment: 1c. By the way, the energy minister's comments are very disingenuous. In fact, Saudi will have to increase production in July/August to meet its own domestic requirements for air conditioning. See first comment; I had completely forgotten. Throwing that into the equation may make this entire exercise/this entire note moot. The Saudi energy minister may simply be saying that in July, to meet its own domestic needs, Saudi, will, of course, increase production. Well, duh.]
2. The Saudis maintain they have a dual mandate when it comes to oil: a) their own interests; and, b) global interests: smoothing the global supply/demand curve. The energy minister is speaking to the second mandate.
2a. See "game's on": the Saudis don't think US shale industry can meet summer driving demand; Saudi doesn't want to risk a supply shortfall.
2b. The negotiated OPEC cut is to last for six months, taking us through the month of June. By the first of July, the US driving season is well on its way; by July there will be a 30-day gasoline supply in the US.
2c. Some (including Bloomberg) argue that going back to the way things were in July, 2017, will be a bit soon, probably way too soon.
Bottom line: why did the energy minister make this statement at this time? I think it was for these two reasons:
3. It was a message to US shale companies -- moderate your CAPEX. If you want to take advantage of OPEC's decision to cut back, OPEC can return with a vengeance; we can flood the markets again.
4. It was a message to other OPEC countries: don't cheat. This will all work out fine if everyone stays the course. And if you cheat, Saudi can make it really, really rough on you again as soon as this summer.
Regardless, it was wishful thinking.
5. Ninety percent (90%) of Saudi Arabia's revenue comes from oil. Their 2017 budget is said to be based on $80-oil (wink-wink). At $50 oil, they simply can't make it. They are on track to hitting an all-time low in foreign reserve assets in about nine (9) months (that is this year), and, although it's hard to believe, Breitbart had a story some time ago (linked earlier at the blog) that at the current rate of decline, Saudi's foreign reserve fund could be depleted in as little as four years.
On top of that, the IMF has estimated that Saudi's GDP growth, at 0.4% this year, will be essentially flat.
This country is in dire straits.
Meanwhile, the price of WTI continues to fall, now down to $51.53 or thereabouts.
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Platts Take On This
Shortly after the above was posted,
Platts posted a note:
- OPEC expects demand for its own crude oil will fall but "is mindful" that return of US shale could dent positive early signs of non-OPEC compliance
- OPEC appears to "be serious": says it will produce 33.085 million bopd in December, down slightly more than 220,000 bopd from November (do recall that OPEC pumped as much as it could leading up to the cut)
- OPEC projects crude oil production in 2017 to be held at 32.10 million bopd, just below the target of 32.5 million bopd
- US oil production has been revised upward by 230,000 bopd
- non-OPEC oil production will grow to an average 57.26 million bopd in 2017 vs 57.14 million bopd in 2016; this is a 180,000 bopd smaller increase than previously forecast (Russia, Norway, China, Kazakhstan, Congo)
- Saudi Arabia:
- Saudi leading the way, estimates: production down to 10.474 million bopd (December) from 10.623 million bopd (November) -- but again, max production prior to cut
- Saudi told OPEC it had produced 10.465 million bopd (December), a seven-month low
- Saudi's commitment: 10.06 million bopd between January - June, 2017
- Yes, here it is: "Saudi's output rose to record levels last year, reporting production above 10.6 million bopd for five successive months. In 2015, output averaged 10.193 million bopd
- in fact, it was reported that Saudi hit an all-time high of nearly 10.7 million bopd in December
- Meanwhile, Iraq:
- second largest OPEC producer
- December: record high 4.83 million bopd, up 30,000 bopd from November; secondary sources say Iraq produced 4.632 million bopd in December
- under the OPEC deal to cut, Iraq's goal: 4.351 million bopd
To me, this looks like a lot of smoke, and not a whole lot of fire:
- the numbers are not particularly remarkable
- OPEC produced at max rates going into negotiations
- agreed cuts appear to bring everyone back to "normal"
- no one believes the "official" numbers: that's why we have "secondary sources"
- I thought I read somewhere that Saudi was below 10 million bopd production -- yes, here it is, over at Zacks
I guess one can come up with any number one wants.
And, then of course, we have all that oil sloshing around in tankers and pipelines from Timbuktu to Toronto.
