OPEC-Non-OPEC Deal Has New Features
- Expanded role of non-OPEC producers
- Production cuts focused in near term
- U.S. drilling is recovering
- Large natural gas withdrawal overshadowed by warmer weather outlook
A spate of self-congratulation by the signatories surrounds oil pricing in the aftermath of the OPEC-non-OPEC production agreements. And in truth, this agreement appears to contain elements new to the world of OPEC production control.
One thing is the inclusion of Russia with support apparently from the very top of its government. Another is the relatively short term of the deal. This has the effect of lifting the near months of the price curve, arguably inhibiting longer-dated hedging activity by U.S. producers.
The agreement is not yet in force, but announcements of lower shipments in the new year have been reported. This lends credibility to the agreement. Whether this evidence holds up over a longer time remains to be seen, especially in light of reports that the International Energy Agency put November OPEC output at 34.2 million barrels daily—about one-half million barrels per day higher than OPEC’s estimates. Production cuts that follow next year may simply return output to levels that already contributed to the excess supply and pressure on prices.
Supply in the United States must add to the OPEC-non-OPEC producers’ concerns. Prices for WTI crude oil hit a low in February at $26.05. They have since doubled, topping at $54.51 before easing back post-OPEC agreement. And supply has reacted bullishly.
Drilling has recovered impressively. The Baker-Hughes weekly report of active rigs showed 498 rigs in its report of December 9. This represented a gain of more than 180 rigs in the past seven months. About two-thirds of the gain has been in Permian Basin fields. The Permian Basin reportedly has the largest shale formation in the country.
As a practical matter, higher prices are already impacting supply. Domestic production bottomed in July at 8.428 million barrels per day. The latest U.S. Energy Information Administration (EIA) supply balance showed output at 8.796 million barrels daily. One-quarter of the increase in production occurred in the most recent report week.
Higher prices will encourage a further expansion of drilling. Fifty-two dollars remains critical in evaluation of the price outlook.
Supply/demand data in the United States for the week ending December 9, 2016, were released by the EIA.
Total commercial stocks of petroleum decreased 2.0 million barrels during the week ending December 9, 2016.
Increases were reported in stocks of gasoline, fuel ethanol, K-jet fuel, residual fuel oil and other oils. Draws were seen in stocks of distillates and propane.
Commercial crude oil supplies in the United States fell to 483.2 million barrels, a decrease of 2.6 million barrels.
Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks fell 0.3 million barrels, PADD 2 (Midwest) stocks declined 0.2 million barrels, PADD 3 (Gulf Coast) crude oil stocks slipped 0.4 million barrels and PADD 5 (West Coast) crude stocks decreased 2.3 million barrels. PADD 4 (Rockies) crude oil stocks increased 0.5 million barrels.
Cushing, Oklahoma, inventories increased 1.2 million barrels from the previous report week to 65.3 million barrels.
Domestic crude oil production increased 99,000 barrels daily to 8.796 million barrels per day.
Crude oil imports averaged 7.360 million barrels per day, a daily decrease of 943,000 barrels. Exports fell 14,000 barrels daily to 485,000 barrels per day.
Refineries used 90.5% of capacity, an increase of 0.1 percentage points from the previous report week.
Crude oil inputs to refineries increased 57,000 barrels daily. There were 16.474 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 33,000 barrels daily to 16.702 million barrels daily.
Total petroleum product inventories saw an increase of 0.6 million barrels from the previous report week.
Gasoline stocks added 0.5 million barrels. Total stocks are 230.0 million barrels.
Demand for gasoline increased 116,000 barrels per day to 8.874 million barrels daily.
Total product demand decreased 223,000 barrels daily to 18.879 million barrels per day.
Distillate fuel oil supply decreased 0.8 million barrels. Total stocks are 155.9 million barrels. National distillate demand was reported at 4.030 million barrels per day during the report week. This was a weekly increase of 326,000 barrels daily.
According to the EIA:
Working natural gas stocks post largest December net withdrawals since 2013. Net withdrawals from storage totaled 147 Bcf, compared with the five-year (2011 – 2015) average net withdrawal of 79 Bcf and last year’s net withdrawals of 46 Bcf during the same week. This reporting period is the first time since 2013 that withdrawals from working natural gas topped 100 Bcf in December.
This week posted the third largest December withdrawal since 2010, behind pulls in 2013 of 285 Bcf and 177 Bcf on December 13 and 20, respectively. Working natural gas stocks total 3,806 Bcf, which is 186 Bcf more than the five-year average and 50 Bcf less than last year at this time. Working natural gas stocks fell below the five-year maximum for the first time since April 15, 2016.
Expectations topped history for natural gas prices following release of the storage data. The market expected a withdrawal 128 Bcf, a number far exceeded by actuality. Nonetheless, prices reacted bearishly, ending the trading day down 10.6 cents at 3.434. The decline was attributed to expectations that weather would turn warm around December 21 through year end. Price support is now at $3.366.
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