OPEC Doubles Down

Jim Brown
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OPEC appeared to double down on the concept of gaining market share by producing more barrels at a lower price. They kept the posted speed limit at 30.0 million barrels per day but plan on producing much more in the months to come.

The OPEC production quota is just a few pixels on a screen and it has no relevance to the real world. In May OPEC produced more than 31.58 million barrels per day and multiple countries are rapidly expanding their drilling operations in order to produce more oil and offset falling revenues.

The United Arab Emirates (UAE) signed contracts last week worth $543 million to buy 14 new rigs in order to increase their output. National Oilwell Varco won one contract for an onshore rig. Lamprell won a contract to build an offshore rig. China Petroleum Technology & Development won a contract to supply 12 onshore rigs. The UAE said the additional rigs were needed as a result of "growing demand" from their customers.

Saudi Arabia is running the most active rigs on record at 125, up from 96 a year ago. This clearly shows Saudi Arabia is trying to ramp up additional capacity as quickly as possible. This could be used to keep oil prices low and to keep pressure on Iran once the sanctions are lifted. Saudi does not want Iran to see a monster jump in oil revenue since it would be put to use spreading terrorism and building additional weapons.

Khalid al-Falih recently replaced long time oil minister Ali al-Naimi as the chairman of Saudi Aramco. Maintaining an active drilling program to increase production rather than just maintain production appears to be a goal.

Iran said it could boost exports by 500,000 bpd within 3 months of sanctions being lifted and raise that to 1.0 mbpd within six months. Iran wants all sanctions lifted on June 30th but the P5+1 nations want them lifted in sections over time as Iran complies with the conditions of any deal. The odds of a deal with Iran by June 30th are very slim. Iran warned OPEC to "make space" for Iranian exports if they wanted to keep prices where they were. That meant OPEC nations would have to reduce exports to make room for Iranian exports. That is not going to happen.

Iraq's oil minister said on Friday that exports would exceed 3.3 mbpd by the end of December and rise to 6.0 mbpd by 2020. That was a downward revision from 9.0 mbpd from a year ago. He said Kurdistan was going to raise exports to 550,000 bpd in 2015. Currently they are exporting about 350,000 bpd. ISIS has been a factor in limiting the progress by the Kurds in raising the exports. The Kirkuk field has been threatened multiple times.

Last month Iraq exported an average of 3.145 mbpd, up +68,000 bpd from April and a record post Saddam high. The country said it plans on increasing exports by 100,000 bpd in June. Iraq said it was ready to ship 800,000 barrels of Basrah Heavy, a new grade introduced this month. Platts said current Iraqi production was about 3.6 mbpd.

Several OPEC nations said supply and demand was improving. Kuwait called the market "very encouraging" and said "prices were good." The UAE said the glut had decreased significantly. Of course Venezuela complained the market was oversupplied by 2.5 mbpd and lobbied for OPEC to cut production.

Libya has the capacity to export 1.3 mbpd of light crude but they are currently limited to about 300,000 bpd because of the civil war. If they are ever able to end the violence they could ramp up exports quickly and add about 500,000 bpd in a very short time. That would only add to the global glut but the odds of a resolution to the war are very slim.

The Conoco CEO spoke at the OPEC meeting and warned that lower prices were not going to kill shale production in the USA. "US shale is here to stay" he told the audience. Using a baseball analogy "we are in the second inning of a nine inning game." The shale industry is going to have a lot of efficiency gains and it will lower the cost of production. Shale drillers have already cut their costs from service companies for things like fracking and well servicing by 30% and prices will probably decline further. He said the industry will survive at $60 Brent and once prices stabilize the rig count will begin to grow again. He also warned that the export ban on U.S. crude could be lifted in the coming months and that would also pressure waterborne crude prices. I am sure the assembled OPEC ministers were happy to hear that.

Crude prices closed on Friday at just under $59.

Active Rigs

Active drilling rigs declined -7 to 868 for the week ended on Friday. This was the 26th consecutive week of declines. Oil rigs declined -4 for the week to 642. Active gas rigs fell -3 to 225. Active rigs have now declined -1,063 since the high of 1,931 in September. That is a -60% drop. Active offshore rigs declined -2 to 27 and well off their January high of 60.

Oil Inventories

Crude inventories declined -1.9 million barrels to 477.4 million.

Refinery utilization declined slightly to 93.2% last week from 93.6%. Imports rose +677,000 bpd. U.S. production rose another +20,000 barrels to 9.586 mbpd. This calls into question the report that the prior week was a catch up from a pipeline outage.

Cushing inventories declined slightly to 59.0 million. Oil in storage at Cushing will not begin to decline significantly until the next futures cycle. Speculators that bought oil and stored it at Cushing while selling into a longer dated futures contract will "deliver" that oil when their contract expires. That could be next month or several months from now. Meanwhile Cushing has no available storage for future speculation.

EIA Crude Inventory Chart

Gasoline inventories declined only -.3 million barrels to 220.3 million. Gasoline demand declined sharply by -756,000 bpd and imports fell -83,000 bpd.

Distillate inventories rose +3.8 million barrels to 132.6 million. Demand fell -432,000 bpd. Imports fell -184,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.

Jim Brown

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