Conflicting Views

Jim Brown
 
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OPEC and the IEA seem to be looking at a different set of numbers. OPEC expects a continued glut while the IEA is seeing the supply demand imbalance shrinking.

Saudi Arabian production hit a record high in July at 10.67 mbpd. This is a sign the top oil exporter is still trying to capture market share at the expense of others while oil prices are expected to fall under $40 in the months ahead.

The monthly OPEC report said cartel production hit a new high in July. OPEC said the cartel members produced 33.11 mbpd, up +46,000 bpd from June. That is the highest production since 2008 when oil prices were well over $100. OPEC output does rise in July and August as Saudi Arabia produces an extra 1.0 mbpd to burn to generate electricity for cooling.

OPEC modified their production estimates for non-OPEC countries for supply to drop -790,000 bpd this year rather than the -880,000 bpd they predicted last month. The rise in prices to $50 earlier in the summer caused some producers to restart drilling and to rethink plans to shut in some high cost production. They see total production falling -150,000 bpd in 2017.

OPEC raised their production estimates for 2017 because of the quick recovery from the Canadian wildfires, limited production restarts in Nigeria and the on again, off again restart of Libyan production. They are now predicting demand for OPEC crude in 2017 of 33.01 mbpd, which would still reflect a supply surplus of 100,000 bpd at current production levels. Iran reported production had risen to 3.85 mbpd and the EIA did not expect that level to be reached until mid 2017. Iran has added 560,000 bpd to production in 2016 and Iraq has added 500,000 bpd.

The organization had previously said higher seasonal demand would lead to the "expected rebalancing of the market" in 2017. They are backing off that statement. They still believe global demand will rise 1.15 mbpd in 2017.

Meanwhile, the International Energy Agency (IEA) said oil markets will begin to tighten in the second half of 2016 but at a slow pace because of weak global demand growth and a rebound in non-OPEC production. The IEA said their supply and demand numbers show no oversupply in the latter half of 2016. They also predicted a strong decline in crude inventories in Q3. Since we are halfway through Q3 and inventories have unexpectedly risen for the last three months, it would appear their forecast may have some flaws. Refiners will make gasoline for the next three weeks but once past Labor Day they will go into maintenance mode for 30-60 days where they switch over to winter blend fuels. Before they can begin full production of those fuels they have to let the summer blend fuel inventories to deplete. In that 30-60 day period crude inventories typically rise and prices decline.

The IEA said 2016 demand growth of 1.4 mbpd will decline to 1.2 mbpd in 2017. That is 50,000 bpd more than OPEC's forecast. The IEA also expected production from non-OPEC sources to rise 300,000 bpd in 2017 compared to OPEC's forecast for a -150,000 bpd decline.

Iran expects to sign $25 billion to as much as $50 billion in contracts with foreign oil companies over the next two years. They are preparing to open bids to develop several oil and gas fields and they have identified 34 foreign companies as suitable bidders. They have identified 12 fields they would like to open for development.

However, the IEA said Iran is likely to struggle to attract bidders. Under the terms, the foreign company must joint venture with an approved Iranian firm of which there are currently eight. Foreign companies are not likely to want to invest billions of dollars in firms controlled by Iran in order to develop fields where they may not be assured of a return when developed. There is a history here of nationalism where the foreign firms are evicted for some reason and their assets seized. Russia also has this problem. They cannot get joint development dollars because they have seized fields once they were developed and kicked the firms out of the country.

Active oil rigs in the U.S. have risen by more than 50 over the last six weeks. Production has not set a new low for this cycle since the week of July 1st. The rebound has not yet begun but the bleeding has stopped.


The odds are good we are going to see crude prices under $40 again over the next two months. The wild card there is the new headlines about the potential for an OPEC production freeze after a meeting in late September. OPEC is like the Federal Reserve. They are all talk and no action. This time around they may get closer than the last time several months ago. Everyone is feeling the pain and with supply and demand supposedly returning to balance in 2017, Saudi Arabia and Iran do not have as much to lose by going along with the plan. We all know everyone will cheat anyway but the headlines could help lift oil prices between now and the end of September.


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  Active Rigs

Active drilling rigs rose +10 to 431 for the week ended on Friday 7/1. That is the largest weekly gain since August 2015. Oil rigs rose +11 for the week to 341. Active gas rigs fell -1 to 89. Active rigs have now declined -1,500 since the high of 1,931 in September 2014. Active offshore rigs fell -2 to 19 and a low for this cycle after peaking at 61 in 2014.


Oil Inventories Week Ended 8/5/16

Crude inventories rose +1.1 million barrels to 523.6 million. This was the third consecutive week of gains in a period that normally sees inventory declines. The historic high at 543.4 million was on April 29th.

Refinery utilization fell from 93.3% to 92.2% because of an oversupply of refined products.

U.S. production rose +10,000 bpd to 8.45 mbpd. That is a decline of 1,165,000 bpd from the peak in 2015.

Cushing inventories rose 1.2 million barrels to 65.3 million and a 3-month high.

Gasoline inventories fell -2.8 million barrels to 235.4 million.

Distillate inventories fell -2.0 million barrels to 151.2 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. In the graphic below, green represents a recent high and yellow a recent low.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

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