May 25, 2017 – Story of the week: OPEC meeting – few thoughts and what to focus on today
There is a lot in stake for OPEC during today’s meeting in Vienna – Austria, for all participants. Some of the OPEC members have more to lose than others but at the end everybody needs to keep oil prices higher, the main reason is that their government’s budgets are highly relying on oil income. The equation is very simple: same or little higher production – much lower prices – much less income. But there are some other factors due to particular members may want higher oil prices than others.
At the end of last year OPEC countries and Russia agreed to cut their oil production by 1.8 mil bpd. However the effect of the production cut started to fade after few months as US Shale oil producers managed to lock in prices higher than their costs and since then they are opening one oil field after another bringing the US oil production again back close to 10mil bpd. The other reason the effect of the cut was limited was, that while the OPEC countries more or less complied with the production cut agreement there was no decision that they will also decrease exporting. Hence these countries continued to sell the approximately same amount of oil by emptying their stocks which obviously meant there was no real change in supply. However with OPEC oil stocks lower and summer demand picking up, the extension may have a more balancing effect this time. Therefore the many will search in the agreement today for the word “export”…
US shale oil
The rising US oil production is definitely against bringing the balance back to the market. While before the slump in oil prices the break even for many of the shale oil companies was around $80 per barrel, the companies managed to increase efficiency and the costs were brought down below $55 on average almost in any shale oil basin. The steadily growing number of active oil rigs is confirming the fact that shale oil producers managed to hedge their future production well above their costs and this will mean that for OPEC the balance on the oil market will be harder to achieve.
The US shale oil industry is far from what it’s in the OPEC countries or Russia where the state owned oil companies dominate. In the US the industry is based on free competition with a lot of independent companies. A lot of them bankrupted in the last 2 years but the production capacities was bought by the rest of the industry so there was a much smaller decline than initially anticipated by OPEC.
Saudi Arabia’s planning to sell around 5% of shares of the countries giant oil and gas producers Aramco. This is one of the main reasons Saudi Arabia is pushing for higher oil prices as the valuation of the company mainly depends on the dollar value of the Saudi oil reserves. As the country is changing the taxation regime of Aramco while the production decision will stay purely in government hands to make it look better, this also shows how needed a good valuation of the company.
These are just few factors affecting the decision today but definitely the market is expecting a move from OPEC. The positive thing is that lately Iraq also agreed to join the extension of the cut after the Saudi oil minister visited his counterparty. However the big question everybody is asking now is if the extension will be enough to keep the traders bullish. Many are speculating that OPEC may also increase the amount of the production cut. This was for now not mentioned by the participants. The second question after regarding the deal will be the member’s compliance with the agreement in the coming months that was the key question in 1H of 2017.
Summary what to watch:
- If extending the production cut by how much (6-9 months expected)
- If anything about exports in the wording of the agreement
- If any increase of production
- If Russia will join the extension (crucial)
0800 GMT – OPEC meeting
1300 GMT – OPEC/Non-OPEC meeting
1500 GMT – Joint press conference
Full schedule link
Good Luck and remember to watch your risk and be consistent
Mr Tech Man
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