Markets Focus Again on OPEC Deal
- Output cuts may bring supply back only to pre-agreement levels
- Skeptical view of member compliance
- Thirteen million barrels added to product supply
- Natural gas prices could be forming a top
Sincerely, Alan Levine, Chairman of Powerhouse
This year has opened with four major factors in play. First, the OPEC-non-OPEC agreement, long bruited about as the “real deal,” now faces the test of actual world markets. Second, the United States has taken on a new role as a supplier of crude oil, affecting crude oil imports and thus global balances. Third, difficult circumstances in Latin America and generally strong global demand have heightened the importance of product exports in Western Hemisphere balances. Fourth, greater efficiency is lowering the cost of North American exploration, encouraging the development of new oil and natural gas reserves.
The first test of OPEC-non-OPEC is how closely producers hew to their agreed output cuts. These are treacherous waters to navigate. It is not so much how large a cut is agreed, it is whether the cut is a “real” cut, not a simple return to what existed before the agreement.
Russia offers a good example of this analytical challenge. The country is slated to account for 300,000 barrels per day of the total reduction. In all, the cut for OPEC-non-OPEC is expected to be 1.3 million barrels daily. Russia produces around 11.2 million barrels per day. This level of production is near a record and is nearly 400,000 barrels daily higher than in July, when the push for a reduction began. A 300,000 barrels per day cut would do no more than bring Russian output back close to where it was when the problem was first addressed.
Moreover, there is considerable skepticism that others will keep up their end of the agreement, notwithstanding announced cuts by Saudi Arabia of “at least 486,000 barrels per day.” Iraq says it will cut 200,000 barrels daily. Any evidence that other participants are not following the schedule will almost certainly invite similar cheating by Russia. The agreement then fails. Bullish expectations stand on a very unstable foundation.
Saudi Arabia has put this agreement together with four principles in mind: collective action, fair treatment of the participants, transparency and credibility in oil markets. History tells us that this is a heavy lift.
Supply/demand data in the United States for the week ending December 30, 2016 were released by the U.S. Energy Information Administration (EIA).
Total commercial stocks of petroleum increased 6.1 million barrels during the week ending December 30, 2016.
Builds were reported in stocks of gasoline, K-jet fuel, distillates and residual fuel oil. There were draws in stocks of propane and other oils while stocks of fuel ethanol were unchanged from the previous report week.
Commercial crude oil supplies in the United States fell to 479.0 million barrels, a draw of 7.1 million barrels.
Crude oil supplies decreased in two of the five PAD Districts. PADD 1 (East Coast) crude oil stocks fell 1.2 million barrels and PADD 3 (Gulf Coast) stocks declined 7.1 million barrels. PADD 2 (Midwest) crude oil stocks increased 0.8 million barrels, PADD 4 (Rockies) stocks grew 0.1 million barrels and PADD 5 (West Coast) stocks expanded 0.3 million barrels.
Cushing, Oklahoma, inventories increased 1.1 million barrels from the previous report week to 67.5 million barrels.
Domestic crude oil production increased 4,000 barrels daily to 8.770 million barrels per day.
Crude oil imports averaged 7.183 million barrels per day, a daily decrease of 984,000 barrels. Exports rose 59,000 barrels daily to 686,000 barrels per day.
Refineries used 92% of capacity, an increase of 1.0 percentage points from the previous report week.
Crude oil inputs to refineries increased 132,000 barrels daily. There were 16.689 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 177,000 barrels daily to 16.973 million barrels daily.
Total petroleum product inventories saw an increase of 13.2 million barrels from the previous report week.
Gasoline stocks expanded 8.3 million barrels; total stocks are 235.5 million barrels.
Demand for gasoline decreased 813,000 barrels per day to 8.465 million barrels daily.
Total product demand decreased 2.234 million barrels daily to 17.925 million barrels per day.
Distillate fuel oil supply increased 10.1 million barrels; total stocks are 161.7 million barrels. National distillate demand was reported at 2.792 million barrels per day during the report week. This was a weekly decrease of 1.175 barrels daily.
Propane stocks fell 2.7 million barrels to 84.1 million barrels. Current demand is estimated at 1.375 million barrels per day, an increase of 15,000 barrels daily from the previous report week.
According to the EIA:
Working gas in storage was 3,311 Bcf as of Friday, December 30, 2016, according to EIA estimates. This represents a net decline of 49 Bcf from the previous week. Stocks were 364 Bcf less than last year at this time and 21 Bcf below the five-year average of 3,332 Bcf. At 3,311 Bcf, total working gas is within the five-year historical range.
The New Year opened with natural gas values in free fall. Prices opened at $3.586, a 12-cent gap on Tuesday, January 3. Through the day, prices sank, reaching $3.267 before the close—a 30-cent loss. Prices have since traded in a tight range at these lower levels.
The daily chart of front-month natural gas futures shows the measured November rally and the more intense upthrust of December. The breakaway gap at January’s start could be seen as the beginning of a larger sell-off with support at 2.85.
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