OPEC party continues on

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An OPEC-inspired rally continues for a second day, as the prospect of a production cut means a likely swifter market rebalancing…if it were implemented. (And that is a big IF). Nonetheless, the constructive development is spurring on positive sentiment and buying interest. A non-OPEC meeting in Doha now looms next week, but for now, hark, here are five things to consider in oil markets today.




1) The oil glut of recent times may have been initiated by U.S. shale, but its momentum has been carried on by Saudi, Iraq and Iran. As the chart below illustrates, Saudi has flooded the market since early last year, in an attempt to flush out higher-cost production.

Iraq has similarly ramped up exports, but due to opportunity as opposed to strategy, while Iran’s return to the global market this year after the lifting of sanctions has added an extra layer of oversupply.

After OPEC’s landmark decision yesterday, the hard work for the cartel begins in earnest. Saudi’s heavy lifting of nearly 500,000 bpd doesn’t actually appear that back-breaking, given it seasonally reins in production by this much anyway after a mid-summer peak (a drop we didn’t see this year…hmmm).

As for Iran, oil minister Bijan Zanganeh seemed as happy as Larry after yesterday’s meeting, and so he should be, given Iran is still allowed to increase production, while most others cut. The willingness of Saudi to get this deal done is starkly illustrated by it granting its arch-rival such a concession. As for who feels most gipped from this meeting, it has to be Iraq, given it has rolled over and agreed to cut by 200,000 bpd. There’s plenty more twists left in this tale, I assure you.

saudi iraq iran cnbc chart nov 2016.jpg

2) The graphic below is a nifty aggregated view of OPEC production. Not only does it affirm what we mentioned above re Saudi, Iraq and Iran being key players, but it also highlights how these three have been the nations to see the biggest pop in output in recent years. Meanwhile, there is Gabon at the opposite end of the spectrum.    

OPEC production Nov.jpg

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3) The epic graphic below underscores why OPEC has finally been corralled into a cut; production costs of U.S. shale have roughly halved in recent years, indicating that we’ll see increasingly higher production going forward if prices remain supported.

In the Bakken, the first U.S. shale play to see production over 1mn bpd, there are around 2,000 square miles in Dunn County where production costs have dropped to $15/bbl. About a fifth of North Dakota’s production – some 200,000 bpd – come from this county. All five shale plays in the graphic below show average wellhead breakevens below $40/bbl.  

falling US shale costs.jpg

4) Yesterday morning I was interviewed on NPR Texas to give an immediate response to the OPEC decision, and what it means for Texas. While the total US oil rig count has increased by 50 percent from its lows in May, the Permian rig count has accounted for much of this increase, rising by 72 percent.

After bottoming out in late April, two months after oil prices reached their lows, the Permian basin now accounts for 228 rigs, nearly half of the U.S. total of 474. As the chart below illustrates, as prices grind higher, the rig count is only going to go one way. (Um, up).  

US shale increase.jpg

5) Yesterday’s weekly inventory report somewhat faded into the background amid the OPEC circus. The key takeaway was that inventories yielded a modest surprise draw, led by a big drop in crude inventories on the East coast amid lower imports – even though refinery runs also dropped off. 

Total refinery runs showed a counter-seasonal drop (hark, below), but subdued crude imports meant we still saw a draw to inventories. The overall report was fairly neutral given solid builds to gasoline and distillates; mildly bullish crude, modestly bearish for the products.  
ref runs nov.jpg