Expectations going into the OPEC monitoring
meeting in St. Petersburg were low. The OPEC agreement to reduce
output appeared to be fraying. June output appeared to have increased in
several countries, and private sector estimates suggest output rose further in
July. Russia expressed reluctance to extend the agreement further.
Ecuador announced it would no longer participate in the output restraint.
Hopes that Nigeria and Libya, who were exempt from the quota, would cap output
were played down in recent days.
Initial reports suggest the outcome was
better than expected. Saudi Arabia agreed to cut its output further and would limit its exports to 6.6 mln
barrels a day. In the first five months of the year, Saudi Arabia
exported 7.2 mln barrels a day. Reports suggested the kingdom
increased its output by about 50k barrels a day, and many observers though this was in violation of its
agreement.
However, there are two important points.
First, Saudi’s output cut was deeper than it had agreed to, so the small
increase does not put it out of compliance. Second, Saudi Arabia is one
of a few countries that burn oil for
electricity. Saudi Arabia’s electricity demand rises in summer months as
air conditioning use increases.
Also,
Nigeria has agreed to limit its output to 1.8 mln barrels a day. It
reportedly produced 1.6 mln barrels a day in June. It appears Libya may
be more willing to discuss a cap after it reached 1.25 mln barrels. Last
month’s production was seen near 820k
barrels. These limits do not pinch output but show that OPEC’s
output is not unlimited either.
The Saudi focus on exports seems to be a new
development/emphasis. Between October 2016 and June 2017, OPEC output
fell 920k barrels a day. However, exports were only 120k barrels a day
less, according to Kpler, a ship-tracking
company. This implies that although
output has been cut, the amount of oil
OPEC is providing to the world has edged only slightly
lower.
Despite the reluctance of Russia to extend
output cuts, the UAE energy minister suggested that OPEC may still be open to
discussions. The outlook is not clear. The
lack of agreement from non-OPEC producers would argue against it, but what is
the alternative. There are three different ways to think about oil
prices for producers:
- How much it costs to produce a barrel of oil?
- What price of oil is necessary to record a balanced budget
- What price of oil is necessary to balance the external
accounts?
Of course, the answer
varies from country-to-country, but the bottom line is that the low price of
oil is still causing fiscal strains on many oil producers, even if their cost
of production is lower than the US shale producers, for example.
Meanwhile, Saudi Arabia has cut its shipments
to the US. The US imported 524k barrels a day from Saudi Arabia in
the weekend ending July 14. This is
the lowest volume in more than seven years. While trying to reduce US
inventories may be the major motivation for the reduced shipments, there may be
another factor. Some observers suggest that Saudi’s move may be related
to the potential US sanctions against Venezuela, its third largest
supplier. A cut in Saudi shipments
may make it harder for the US to cut purchases from Venezuela. Venezuela
has a large debt payment (~$5 bln) due in the fall,
and a reduction oil purchases would put additional pressure on the troubled
country and has around $10 bln of reserves.
The market expects US oil inventory to have
fallen by nearly four mln barrels for the
week ending July 21. Such a decline would bring the four-week decline
to over 20 mln barrels. This would
be among the largest four-week draws in the last few years and could be supportive for prices. After some modest
follow-through sales after the 2.5% decline before the weekend, the September
light sweet crude oil futures contract is recovering. Initial resistance is seen near $46.60-$46.85 and then
$47.30-$47.70. If oil prices get much above this secondary resistance,
and it would appear to complete a bottoming.