It may not be on your economic calendar, but on July 24 OPEC meets in St.
Petersburg, and there is a reasonably
good chance that efforts to bring Libya and Nigeria into the quota system may
succeed. According to a report from the OPEC Secretariat that draws
on secondary sources (apparently national sources are not reliable).
Libya’s output is up 460k barrels a day since the start of the year,
while Nigeria’s output has risen 175k barrels a day. Civil wars in
both countries had reduced output, and therefore were not
included. Libyan output is its highest in couple years, but still only a little more than
half of its 2014 peak. Nigerian output is just below 1.8 mln barrels a
day, a level that officials previously seemed receptive to capping.
Most other OPEC countries have reduced output this year. In
addition to Libya and Nigeria, output increased in two other countries:
Iran and Iraq. Iraqi output put has risen 110k barrels a day this year.
Half of the increase took place in June. Iran boosted its output by 270k
barrels a day this year. This was
largely a Q1 phenomenon. In Q2 Iranian
output was virtually unchanged just below 3.8 mln barrels.
OPEC’s challenges are internal not just external. There is some
risk of compliance going forward, especially if
there does not appear to be much appetite for deeper cuts or a longer
extension. That said, the increase in Saudi output is not a harbinger of
their defection. What is often forgotten is that Saudi Arabia is one of
the few countries that burn oil for electricity. It often boosts output
in the summer months to meet the electricity demand associated with increased
air conditioner use.
US oil inventories have fallen by a dramatic 13.8 mln barrels over the
past two weeks. This is the
largest two-week draw since early last September. Nevertheless, we are
hesitant about reading too much into it. The reduction in inventories
appears to be a function of stepped up refining operations and exports.
The refiners worked at seasonally high levels.
US is exporting more than 900k barrels a week, an 80% increase over Q2
16. US oil imports have also fallen, allowing China to take the dubious
honor of being the largest oil importer in H1.
Outside of the OPEC and the US, the other large oil story this week is
the two apparently large finds in Mexico. After many years of
dragging its feet, Mexico finally opened up its oil exploration and production
to private sector businesses, and it is from this
approach that the new discoveries were made.
Preliminary reports suggest both fields could hold a billion barrels of
oil.
The August light sweet oil futures contract has advanced every day this
week. Recall that the price of oil fell for five consecutive weeks
from late May through late June In the last week of June it rose by 7% and fell almost 4% last
week. It has recouped last week’s losses this week and a little bit
more. The near-term technical readings are constructive, and the weaker US dollar also helps. Last week’s
high was near $47.30, and that represents
the next target, which also is the 50% retracement of the decline in late May
when the price was last above $52 a barrel. Above there is the $48.35
area, which is the 61.8% retracement and congestion from last
month.