Reality bites

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Six months after the implementation of the OPEC production cut deal to reduce output by 1.2 million barrels per day, and we should be well on our way towards rebalancing – yet prices have just reached a new low for the year.

OPEC actually exported more crude in June than it did in October (the production cut deal reference level), while total global crude exports are over 10 percent higher than year-ago levels. While hope springs eternal, reality bites.


OPEC exports in June outpaced year-ago levels by over 2 million barrels per day, with every country exporting more crude, with the exception of Algeria and Qatar. This stat alone goes some way to explaining why we are mired in mid-forty dollardom.

But things could have been so different – as exemplified by April’s export volumes. Not only did Saudi slash its exports in April, but it was joined by other members of core OPEC, Kuwait and UAE. The result was the first year-on-year deficit since early 2015. May played out in a similar fashion, as only a minor year-on-year surplus was seen as Saudi continued to crimp its exports. Come June, the wheels have fallen off the cart (el’s compliance):

OPEC YoY June 2017.jpg

While ‘OPEC versus US shale‘ is pitched like some heavyweight boxing match, too much emphasis is being placed on rising US production. That said, shale production is contributing to the excess of light crude that is available in the global market.

The Wall Street Journal highlighted yesterday how China has been pulling in an increasing amount of U.S. crude, given the favorable movement in the spread betwixt WTI and the Dubai-Oman benchmark this year. A similarly advantageous move in the Brent / Dubai-Oman spread has prompted an even more prominent response in U.K. North Sea arrivals to China – climbing above 400,000 bpd last month for the first time.

According to Occidental Petroleum, the owner of the most prolific crude-exporting terminal in the U.S. at Corpus Christi, U.S. exports could reach 3 million barrels per day in the coming years. Welp!

China imports of US UK crude ClipperData.jpg

This excess of light crude available in the global market is being joined by West African barrels, and specifically from Nigeria. It is estimated this week that there are at least 40 Nigerian cargoes to be loaded in August looking for buyers. (Let’s save the topic of rocketing Libyan exports for another time).

The return of the Forcados stream in May – after a near complete absence of loadings in 2016 – is diminishing the favorability of other Nigerian grades, leaving them to go unsold. Forcados loadings reached nearly 190,000 bpd last month:   

Nigeria June 2017 exports Forcados ClipperData.jpg

While light crude continues to hit the global market, U.S. inventories are being watched with a surgical focus, given their potential to be the canary in the coalmine to signal market rebalancing, ergo doubling up as a proxy for OPEC progress. 

Progress is being made on this front; U.S. crude inventories are showing a much lesser build year-to-date versus last year, even when aided by the injection of additional barrels from the SPR. Nonetheless, waterborne imports have still been stronger in the first half of this year compared to year-ago levels, with OPEC sending over 300,000 bpd more crude through the first six months of 2017. 

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After deliveries ramped up from Saudi Arabia in January and February, they have been comparative to year-ago levels since. Iraq, however, has sent more crude each month versus year-ago levels for the last year and a half. 

Total OPEC deliveries to the U.S. have shown a solid dip in June versus the prior month, but have still managed to come in above year-ago levels. If the cartel wants to slash OECD inventories, they need to get serious about cutting flows to the U.S. in the second half of the year; they didn’t in the first.  

US imports of Saudi Iraqi crude YoY ClipperData Jun 2017.jpg