OPEC Production Cut Expiration Raises Concerns
- Saudi Arabia and Russia concede need to extend cut
- History shows extending cuts has little market impact
- History shows deeper cuts boost prices short-term
- Countervailing U.S. production growth now at 9.3 MMbpd
- China will ease import restrictions on U.S. natural gas
Sincerely,
Alan Levine, Chairman of Powerhouse
The Matrix
The tension between OPEC-non-OPEC (O-n-O) crude oil producers and those in the United States took another turn last week.
The current O-n-O agreement is soon to end. Despite industry talk of its success, the amount of crude oil taken from the market has not been enough to raise prices to budget-balancing levels required by the O-n-O producers.
Since the start of 2017, West Texas Intermediate (WTI) futures prices have not been able to top $55. Since March, their trajectory has been down. Practicality has taken center stage: Saudi Arabia and Russia have recognized the need to extend O-n-O for nine more months. This will bring the period of constraint to March 2018.
Both Iran and Iraq have signaled their approval of the deal. Moreover, Saudi Arabia and Russia have upped the ante. They have reportedly promised “to do whatever it takes” to stabilize the market, measured by reducing commercial stocks of oil to their five-year average.
A 2010 study of market action following a decision to cut output concludes the result is a short price rally. A rollover of an existing agreement, however, had little impact on prices. This presumably reflected the market’s anticipation of the continuation eliminated the element of surprise. An expansion of the cuts might have a more bullish effect.
Most of the reporting on O-n-O focuses on the petroleum world outside the United States. The growth in shale oil production is bringing this country to the top of the list of world producers and newly permitted exports are starting to influence balances elsewhere.
Activity in the Permian Basin has been intensifying. It is reportedly the most active oil field in the country. Expanding domestic production has reached 9.3 million barrels daily, countering O-n-O’s efforts at restraint. In February, global crude oil supplies were estimated to be 3.05 billion barrels, frustrating O-n-O’s efforts at reducing inventories and supporting prices. And, of course, U.S. producers cannot make agreements to control output; that is the task of the market. The Permian Basin provides about a quarter of American output.
A measure of growth expectations in the Permian is the rise in the cost of rigs. Current costs are running just under $20,000. New rigs could run $25,000.
Supply/Demand Balances
Supply/demand data in the United States for the week ending May 12, 2017, were released by the Energy Information Administration (EIA).
Total commercial stocks of petroleum increased 4.3 million barrels during the week ending May 12, 2017.
Draws were reported in stocks of gasoline, K-jet fuel and distillates. There were builds in stocks of fuel ethanol, residual fuel, propane and other oils.
Commercial crude oil supplies in the United States decreased to 520.8 million barrels, a draw of 1.8 million barrels.
Crude oil supplies decreased in two of the five PAD Districts. PAD District 3 (Gulf Coast) crude oil stocks fell 5.5 million barrels and PADD 4 (Rockies) stocks declined 0.3 million barrels. PAD District 1 (East Coast) crude oil stocks rose 0.7 million barrels, PADD 2 (Midwest) stocks increased 1.2 million barrels and PADD 5 (West Coast) stocks grew 2.0 million barrels.
Cushing, Oklahoma, inventories were unchanged from the previous report week at 66.3 million barrels.
Domestic crude oil production decreased 9,000 barrels daily to 9.305 million barrels per day. This decline in overall production is due to a 21,000 barrels per day drop from Alaskan fields; domestic crude oil production in the Lower 48 showed a 12,000 barrel per day increase.
Crude oil imports averaged 8.590 million barrels per day, a daily increase of 970,000 barrels. Exports grew 393,000 barrels daily to 1.086 million barrels per day.
Refineries used 93.4% of capacity, an increase of 1.9 percentage points from the previous report week.
Crude oil inputs to refineries increased 363,000 barrels daily. There were 17.122 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, grew 350,000 barrels daily to 17.384 million barrels daily.
Total petroleum product inventories saw an increase of 6.1 million barrels from the previous report week.
Gasoline stocks decreased 0.4 million barrels; total stocks are 240.7 million barrels.
Demand for gasoline rose 44,000 barrels per day to 9.452 million barrels daily.
Total product demand decreased 1.061 million barrels daily to 19.484 million barrels per day.
Distillate fuel oil supply fell 1.9 million barrels to 146.8 million barrels. National distillate demand was reported at 4.215 million barrels per day during the report week. This was a weekly increase of 76,000 barrels daily.
Propane stocks rose 0.6 million barrels; total stocks are 42.2 million barrels. Current demand is estimated at 548,000 barrels per day, a decrease of 159,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Net injections into storage totaled 68 Bcf, compared with the five-year (2012 – 2016) average net injection of 87 Bcf and last year’s net injections of 71 Bcf during the same week. Working gas stocks total 2,369 Bcf, which is 256 Bcf more than the five-year average and 375 Bcf less than last year at this time. This year-over-year deficit prevails in each of the regions of the Lower 48 states.
New markets for domestic natural gas are likely to develop in China. The United States and China have reportedly developed terms granting U.S. natural gas exporters easier access to markets in China.
Exports of liquefied natural gas (LNG) have thus far been limited. Companies seeking permits for new facilities could make the U.S. a net exporter by 2018. With proven reserves of more than 300 trillion cubic feet, among the top five supplies in the world.
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