OPEC Agreement Takes an Unusual Turn
- Oil prices move higher on news of deal
- Pact includes non-OPEC producers
- National financial stringencies bring traditional rival together
- Natural gas prices have recovered 38% of loss since 2014
“Putin wants the deal. Full stop. Russian companies will have to cut production,” said a Russian energy source. This quote, from a Reuters news story published after the OPEC-non-OPEC production agreement, may well summarize the unusual response to the pact.
Prices vaulted higher and, after two days during which West Texas Intermediate (WTI) crude oil added more than $6.50 to value, remained at the top of their range. Moreover, they challenged resistance at $52.00 for crude oil futures and $1.6650 for ultra-low-sulfur diesel (ULSD). Ordinarily, traders would expect selling to emerge, following the adage to buy the rumor and sell the fact.
The agreement establishes country-by-country reductions in crude oil output starting in January. The agreement also contemplates cuts in output from non-OPEC countries too, notably Russia. In all, the group is expected to take 1.8 million barrels daily from the market, 1.2 million barrels per day from OPEC members. Saudi Arabia is taking the largest cut at 486,000 barrels per day, and Iraq is to cut 210,000 barrels daily. The rest is to come from non-OPEC producers. Russia is expected to lower output by 300,000 barrels daily.
Historically, production control agreements among OPEC members have had a poor success record. Moreover, geopolitical and societal differences among the OPEC members have worked against compliance. The realities of excess crude oil in the market and its effect on national budgets may have operated to bring historically antagonistic nations to agreement. And the assurance by President Putin that Russia will cut as agreed lends a credibility to this deal not present in the past.
The negatives cited by many analysts are still sources of concern for the group. Overproduction among the group can still occur, and the ability of United States producers to expand output remains an important balance wheel for pricing. Nonetheless, we ignore the message of the market at our own peril. Approval of the OPEC-non-OPEC production arrangement at the highest levels of the Russian government may provide the basis for a successful control agreement.
Supply/demand data in the United States for the week ending November 25, 2016, were released by the Energy Information Administration (EIA).
Total commercial stocks of petroleum increased 0.5 million barrels during the week ending November 25, 2016.
Increases were reported in stocks of gasoline, K-jet fuel and distillates. Draws were seen in stocks of fuel ethanol, residual fuels, propane and other oils.
Commercial crude oil supplies in the United States fell to 488.1 million barrels, a decrease of 0.9 million barrels.
Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks fell 3.4 million barrels, PADD 3 (Gulf Coast) stocks declined 0.2 million barrels, PADD District 4 (Rockies) crude oil stocks decreased 0.3 million barrels and PADD 5 (West Coast) stocks declined 0.1 million barrels. PADD 2 (Midwest) crude oil stocks increased 3.1 million barrels.
Cushing, Oklahoma, inventories increased 2.4 million barrels to the previous report week at 59.1 million barrels.
Domestic crude oil production gained 9,000 barrels daily to 8.699 million barrels per day.
Crude oil imports averaged 7.548 million barrels per day, a daily decrease of 30,000 barrels. Exports grew 5,000 barrels daily to 474,000 barrels per day.
Refineries used 89.8% of capacity, an increase of 1.0 percentage point from the previous report week.
Crude oil inputs to refineries decreased 114,000 barrels daily. There were 16.283 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 175,000 barrels daily to 16.559 million barrels daily.
Total petroleum product inventories saw an increase of 1.3 million barrels from the previous report week.
Gasoline stocks added 2.1 million barrels; total stocks are 226.1 million barrels.
Demand for gasoline increased 57,000 barrels per day to 9.080 million barrels daily.
Total product demand decreased 276,000 barrels daily to 19.758 million barrels per day.
Distillate fuel oil supply increased 5.0 million barrels; total stocks are 154.2 million barrels. National distillate demand was reported at 3.841 million barrels per day during the report week. This was a weekly decrease of 280,000 barrels daily.
Propane stocks fell 1.9 million barrels to 100.8 million barrels. Current demand is estimated at 1.160 million barrels per day, an increase of 340,000 barrels daily from the previous report week.
According to the EIA:
Net withdrawals from storage totaled 50 Bcf, compared with the five-year (2011 – 2015) average net withdrawal of 44 Bcf and last year’s net withdrawals of 35 Bcf during the same week. This week’s net withdrawals follow last week’s net withdrawals of 2 Bcf, and herald the unofficial beginning of the 2016 – 2017 heating season.
The heating season traditionally begins on November 1, and continues through March 31. However, in recent years, net injections into storage have continued into mid-November. Posting back-to-back net weekly withdrawals suggests that the withdrawal season is under way. Working gas stocks total 3,995 Bcf, which is 235 Bcf more than the five-year average and 24 Bcf more than last year at this time.
Natural gas futures topped at $6.50 at the end of February 2014. Two years later, early in March 2016, prices bottomed at $1.61. Since then, prices have moved steadily higher with few setbacks. They are now testing $3.50, recovering 38.2% of the long decline.
This is a critical point for natural gas pricing. Technically, the market is very overbought and could easily retrace to support at $2.55. If resistance is breached, however, $4.00 or even $4.60 cannot be excluded.
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