OPEC vs IEA: Who"s Right On Oil Prices?

Authored by Nick Cunningham via OilPrice.com,

Last week, the International Energy Agency made a lot of OPEC brows furrow when it warned that 2018 may not be a very happy new year for the cartel.

U.S. shale supply, the IEA said in its December Oil Market Report, is set to grow more than OPEC has estimated and this could be the undoing of the production cut that boosted prices this year.

OPEC, for its part, has insisted that U.S. shale production won’t grow as much as the IEA says, baffling some observers who now wonder who they should believe. But let’s put it another way: If the coach of a football team tells you that his team will win the cup because they’re the best, but the football association has estimated that the team is not the best one in the league, who would you believe?

OPEC has a history of underestimating U.S. shale. This underestimation led to the glut that sank prices in 2014. Now it stands to reason that the cartel is more cautious in its estimates of U.S shale oil developments, but this caution does not necessarily have to be reflected in comments. Let’s not forget that comments from OPEC officials—whether or not grounded in facts—have had a direct and immediate effect on prices from events such as the shutdown of the Forties pipeline network last week.

So, it would make sense to lean more towards what the IEA says, and it says that non-OPEC supply next year will probably rise by 1.6 million bpd—a 200,000 bpd upward revision on the previous OMR. U.S. shale production alone will, according to IEA’s latest estimate, grow by 870,000 bpd in 2018. Meanwhile, demand will rise by 1.3 million barrels daily next year, hinting at another glut in the making. 

Now, OPEC’s last forecast is that non-OPEC supply next year will rise by just 990,000 bpd next year to 58.81 million bpd, although the group does caution that any non-OPEC supply growth forecast involves considerable uncertainties regarding U.S. shale production growth. For the U.S. specifically, OPEC forecasts a 1.05-million-barrel daily supply growth next year, which will be partially offset by declines in producers such as Russia, China, and Mexico, among others.

That’s quite a discrepancy between IEA and OPEC figures, but it’s not the only one. The two more notably disagree on when the glut will be over. IEA is skeptical about it disappearing before the end of next year, while OPEC is upbeat, believing the market will return to balance in the second half of 2018 as demand growth accelerates. 

Sometimes OPEC’s forecasts sound like developments that the cartel can will into existence, and this market rebalancing forecast is one of these cases. It’s true that some OPEC members have been very diligent in their compliance to the lower production quotas. Others not so much, so those from the first group have actually cut more than they agreed to in order to compensate for the non-compliant ones.

Can the overachievers continue doing this to ensure the forecast materializes? They can, but they can’t do anything about U.S. shale, and it’s uncertain whether Russia will stay in the agreement after the end of June: Moscow has indicated it would rather quit as soon as politely possible. OPEC also has another problem that’s been there since the original deal, but recently has been garnering more attention. With oil prices higher, how long until one or more OPEC members decide to drop the deal and cash in on the price increase?

Oil Spikes As Saudis Reportedly Push For OPEC Production Cut Extension

Ahead of tonight"s API inventory data, WTI Crude prices wer fading after 5 straight days higher. That was until WSJ reports Saudi Arabia wants OPEC to extend production cuts, sending oil prices spiking higher...

Reuters additionally reports that OPEC states cut oil output in March by more than they pledged under supply curbs, according to figures the exporter group uses to monitor its supply, extending a record of higher-than-expected adherence to its first production cut in eight years. The Organization of the Petroleum Exporting Countries agreed to cut output by about 1.2 million barrels per day (bpd) for six months from Jan. 1 to prop up prices and reduce a glut. Russia and 10 other non-OPEC states agreed to cut half as much. Production from the 11 OPEC members with output targets under the deal has averaged 29.757 million bpd in March, according to average assessments of secondary sources OPEC uses to monitor its output. The figures were seen by Reuters.

"OPEC"s compliance has been more than anticipated," an OPEC delegate said. "For non-OPEC, it is satisfactory and getting better."

And crude spikes...

This was not the catalyst for stocks" move though as they broke higher earlier./..

The question is how long will this "jawbone" last?

OPEC Jawbone Fails - Oil Spike Erased In 24 Minutes

Well that did not last long...

*  *  *

The bounce off a $47 handle on Friday in WTI was fading fast again this morning...

following news that money managers cut their bullish Brent and WTI oil bets by 154,871 to a net-long position of 699,209 contracts - the biggest decline on record.

While the drop was large, net longs remain extreme suggesting the long squeeze has more to go...

Which of course OPEC had to try and jawbone away...

• OPEC SUPPORT INCREASES FOR EXTENDING OIL SUPPLY CUT INTO H2, BUT NON-OPEC PARTICIPATION NEEDED – OPEC SOURCES - Reuters News

More details from the original Reuters note:

OPEC oil producers increasingly favor extending beyond June a pact on reducing crude supply to balance the market, sources within the group said, although Russia and other non-members need to remain part of the initiative.

The Organization of the Petroleum Exporting Countries is curbing its output by about 1.2 million barrels per day (bpd) from Jan. 1 for six months, the first reduction in eight years. Russia and other non-OPEC producers agreed to cut half as much.

The deal has lifted oil prices LCOc1, but inventories in industrial nations are rising and higher returns have encouraged U.S. companies to pump more. A growing number of OPEC officials believe it may take longer than six months to reduce stocks.

"An extension is needed to balance the market," an OPEC delegate said. "Any extension of the cut agreement should be with non-OPEC."

OPEC sources told Reuters in February that the group could extend the supply-reduction pact, or even apply deeper cuts from July, if inventories fail to drop to a targeted level.

The group wants stocks in the industrialized world to fall to the average of the past five years. According to the most recent data, for January, inventories of crude and refined products stood 278 million barrels above this level.

Five other OPEC sources said it was increasingly clear that the market needed more than six months to stabilize but added that all producers - in OPEC plus non-members - had to agree.

"The ministers will meet in May to decide, but everyone has to be on board," an OPEC source from a major producer said.

OPEC next meets to decide output policy on May 25 in Vienna. There will also be a gathering in May of OPEC and non-OPEC producers, OPEC Secretary-General Mohammad Barkindo said last month.

"Hard negotiations are on the way," another one of the sources said.

There are several catches:

Russia, the largest of the 11 outside producers working with OPEC, has not publicly said whether it supports extending the supply cut, but is wary about the revival of U.S. shale output due to higher oil prices.  "It"s too early to know whether everyone will agree to this," a source from a non-OPEC participant in the deal said, referring to prolonging the output curb.

Despite the potential complication admitted by the OPEC sources that a deal is contingent on getting all OPEC and non-OPEC members, algos were delighted with the initial headline...

... although it is unclear how long the kneejerk move higher will continue.

Will Trump Send The Price Of Oil Soaring?

In its latest, monthly oil production update, OPEC reported that its crude oil output increased by another 240,000 barrels a day in October to 33.64 million barrels a day, a new record high, with Nigeria, Libya and Iraq driving the supply boost and with total production about 1 million barrels higher than the plateau agreed upon in Algiers at the end of September. 

As a result of OPEC"s relentless increase in total output, the cuts OPEC would needs to enforce to reach the Algiers output target just get bigger and bigger...

... most of its as a result of soaring Iranian oil exports - by roughly 1 million bpd - since the easing of sanctions by the Obama administration:

It is also the reason why oil has continued to slide in recent weeks, as the upcoming OPEC production cut (or even freeze) - which will have to be shouldered almost entirely by Saudi Arabia due to production cut exemptions granted to other states, most notably Iran - has lost almost all credibility with the market.

However, suddenly there is a ray of hope in OPEC"s dark world, and it comes courtesy of president-elect Donald Trump, who just may eliminate as much as 1 million barrels of OPEC oil output, or the cartel"s entire excess production, should he undo the deeply unpopular within GOP circles Iran nuclear agreement, which would also collapse Iranian oil exports and send the price of oil surging.

Recall that Trump"s stated number one priority from his pre-election circuit has been to dismantle the "disastrous" Iran deal - although as Bloomberg notes, his to-do list might have changed since saying that back in March. And, as Bloomberg"s Julian Lee calculates confirming our math from just right after the Algiers (non) deal, tearing up the Iran nuclear agreement would remove almost a million barrels a day of supply at a stroke: a million barrels is about the same size as the cut OPEC needs to make.

The next question: can Trump actually undo Obama"s landmark Iran nuclear agreement? According to Lee, the answer is yes, "despite assertions to the contrary from Iran"s President Rouhani and a slew of analysts." Here"s how:

The Joint Comprehensive Plan of Action, as the deal is snappily titled, wasn"t ratified by Congress, but brought into force by President Obama via executive order. Trump could rescind that. The fall-out would be messy, but it could be done (in theory).

There"s another way too, enshrined within the agreement itself. The dispute resolution mechanism allows any signatory to refer a perceived breach of the deal"s terms to the joint commission created to oversee the accord. If the complaining party isn"t satisfied with the outcome and believes the breach constitutes "significant non-compliance", it can refer it to the U.N. Security Council. The Security Council would then vote -- and here"s the killer blow -- - not on whether to re-impose sanctions, but on whether to "continue the sanctions lifting."

That might not sound like a big difference, but it"s critical. By framing the vote this way, the U.S. could, in theory, veto the resolution. All the U.N. sanctions on Iran would then be re-imposed.

Should Trump proceed down this path, it would leave only EU sanctions, which prohibited the importing of Iranian oil into EU countries. And while one might expect a European backlash against unwinding the deal - after all it would remove much of the marginally cheapest oil available to European refiners - it may not be very effective, because as BBG adds, "the tortuous process of re-establishing Iran"s oil trade with Europe shows that only too clearly."

Although there were willing buyers and a very willing seller, the difficulty came in finding insurers who would underwrite the transactions, or shippers to carry the crude. All the big re-insurers had at least some U.S. involvement and they were extremely hesitant to pick up the business -- even with the apparent backing of the Obama administration. They would drop the business like a scalding hot potato if the new president killed the deal. End of Iranian oil flows to Europe.

it wouldn"t be just Europe: Asian buyers, who in the past were threatened with the loss of access to the U.S. banking system to persuade them to cut their purchases of Iranian, promptly abandoned Tehran supplies. They likely would again.

Sure, there would be a reciprocal response, as any attempt to end the deal by Trump would prompt Iran the retaliate and abandon its own commitments. Coming shortly before Iran"s presidential election in May, it would be a huge boost to Tehran"s hardliners. In Bloomberg"s estimates, "you"d expect life to become more difficult for the Americans in Iraq, where it"s engaged alongside Iranian-backed militias in ousting Islamic State from its last stronghold in the country - another Trump priority."

Ironically, such an act by Trump would make him Saudi Arabia"s best friend overnight: should the president-elect remove the burden from the Kingdom to cut its own production by as much as 1 million bpd and shift it to Iran, whose output would be forcibly cut, the Saudis would not only preserve their market share, but enjoy immensely as the price of crude soars back into the mid to upper $50-range. As such, it is unclear if Trump would enjoy being perceived as a firmer hardliner on Iran, yet one who indirectly helps support the nation that has been the most vocal supporter of the Clintons, Saudi Arabia.

Finally, and speaking of the public, any escalation between the Trump administration and Iran which would send oil prices higher, while great for U.S. oil, would be frowned upon by US motorists, who would have to pay more at the pump. The decision who to please will ultimately be Trump"s to make.

WTI Crude Tumbles Back To $43 Handle As Saudi Threat "Denial" Is Denied

What a farce...

First, Reuters reports that Saudis threatened to increase output if Iran disrupts any agreement.

Then we hear from OPEC...

• *SAUDIS DIDN"T THREATEN TO RAISE OUTPUT AT VIENNA MTG: BARKINDO

And now:

• SENIOR GULF OPEC SOURCE SAYS ALL PRODUCERS INCLUDING SAUDI AND GULF OPEC MEMBERS COULD RAISE OUTPUT IF THERE IS NO AGREEMENT

And WTI tumbles...