OPEC's Fake News

Jim Brown
 
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Everyone new OPEC would come up with some kind of announcement to make it appear there was an agreement to cut production.

They surprised everyone with the specificity of the alleged deal. The OPEC producers "agreed" to cut 1.16 million bpd starting in January. Non-OPEC producers supposedly offered to cut another 600,000 bpd making the entire production cut about 1.8 mbpd.

However, you knew there would be a trick to the deal. The claimed production cuts do not start until January. No real problem there since there are mechanics and logistics involved. The problem is the term. The agreement is only for six-months. Not for a year, not until inventories decline, not until prices firm at a higher level but for a short six months.

Need further proof this is a token agreement? Libya and Nigeria are exempt and could actually increase production by a total of 800,000 bpd over the next six months. Iran actually got an increase in production of 90,000 bpd that allows them to expand to pre-sanction levels.

Lastly, Russia said they would cut 300,000 bpd of the 600,000 expected to be cut by non-OPEC producers. However, if you look below the headlines, Russia said they would work towards reducing production over the next six months. That is not a hard number. That is just a number they threw out there to show solidarity with the cartel. Remember, Ronald Reagan's warning about dealing with Russia. "Trust but verify." The same thing goes with OPEC countries.

The IEA claims OPEC produced 33.6 to 33.8 million bpd in October. However, OPEC's "official" numbers used in the deal do not add up to that total with only 32.997 mbpd being recorded. Now add in the 90,000 bpd they are allowing Iran to produce plus the projected 2017 rates by Libya and Nigeria and suddenly the actual "cut" is only about 400,000 bpd.

Libya produced 551,000 bpd in October but expects to be back at 900,000 bpd by the end of December and could add another 600,000 bpd by the end of 2017. That is an extra 349,000 by January. Nigeria produced 1,476,000 bpd in October and expects to be back at 1,899,000 bpd within "several months." That is an increase of 423,000 bpd.


The entire agreement is meant to sound good in short paragraphs and sound bites made by OPEC members to a hungry press. When you actually look at the numbers, it is barely a cut at all.

The big question remains on follow through. It is one thing to say you are going to cut production. If you have no intentions of following through then nothing changed but the price of oil. OPEC members have never strictly obeyed any prior production agreement and I do not expect them to start now. However, this is only a six month agreement and I am sure each of these producers have maintenance issues that need to be addressed and certain fields could be shutdown or production slowed for several months while they take this opportunity to fix their maintenance issues. Think of it as a pit stop at the Indy-500 while there is a caution flag on the track. Cars cannot advance but they can make a quick stop, add fuel and change tires so they will be ready to go again when the race restarts. OPEC members are likely going to take advantage of the temporary publicity to perform maintenance and be ready to go again on July 1st.

OPEC said they would meet again on May 25th to discuss the market and see if they need to vote on extending the agreement another six months.

OPEC will meet with non-OPEC producers on December 9th to discuss the actual cuts, if any from those producers. It is easy to say "non-OPEC producers are going to cut 600,000 bpd" but since nobody has yet agreed to that, it is just another piece of headline spam.

Crude prices immediately spiked nearly 10% because of the heavy short interest. The majority of traders did not expect a credible announcement. The specificity of the announcement and the surprise statement by Russia about cutting 300,000 bpd caused those shorts to run for cover. The actual details did not appear until later in the day and prices faded somewhat.


As the details become commonly known, I would expect prices to fade back to the mid $40s again. With the start of the cut not until January and the actual barrels cut much lower than the headline number, traders will overcome the initial urge to cover and probably begin to add shorts once again.


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  Active Rigs

Active drilling rigs rose +5 to 593 for the week ended on Friday 11/25. Oil rigs rose +3 for the week to 473. Active gas rigs rose +2 to 118. Active rigs have now rebounded to only about one-third of those in service at the high of 1,931 in September 2014. Active offshore rigs were unchanged at 23 after peaking at 61 in 2014.


Oil Inventories Week Ended 11/18/16

Crude inventories fell -1.3 million barrels to 489.0 million. This was a week that normally sees gains. The prior three weeks added 22 million barrels. The historic high at 543.4 million was on April 29th.

Refinery utilization rose from 89.2% to 90.8% as refiners begin to return from the fall maintenance cycle and accelerate production of refined products in an effort to lower crude inventories ahead of the tax deadline on December 31st. They are taxed on all oil in storage on that date.

U.S. production rose -10,000 bpd to 8.69 mbpd. That is a decline of 920,000 bpd from the peak in 2015 of 9.61 mbpd.

Cushing inventories fell -100,000 barrels to 59.1 million.

Gasoline inventories rose +2.3 million barrels to 224.0 million and should continue to rise through December.

Distillate inventories rose +300,000 barrels to 149.2 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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