Second-guessing OPEC’s next moves

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Crude is starting the week by charging lower, as supportive rhetoric from OPEC over the weekend has done little to allay fears of ongoing strong supply this year – especially if OPEC does indeed end production cuts mid-year, and should U.S. production continue to show signs of life. Hark, here are five things to consider in oil markets today.

1) President Trump’s energy plan has been published on the White House website, saying the new President ‘is committed to achieving energy independence from the OPEC cartel‘. This seems an unlikely event, given the U.S. imported well over 3 million barrels per day from the cartel last year, amid joint ventures on the U.S. Gulf Coast with various countries. 

Looking at Arab Gulf flows to the U.S. –  also including Oman – imports averaged over 1.8mn bpd last year. Saudi sent nearly 1.1mn bpd, while Iraqi volumes climbed over 430,000 bpd. Even UAE delivered cargoes in half of all months last year. U.S. crude imports are unlikely to be materially dropping any time soon. 

 

US imports of AG crude jan 2017.jpg

2) Last week we discussed how Saudi Arabia used less crude for power generation last year, as natural gas-fired generation ramped up to offset its direct crude burn. Saudi Aramco is further looking to boost natural gas production at its Hawiyah and Haradh plants, which are part of Ghawar, the world’s largest oil field, as part of its plan to double gas production to 23 Bcm over the next decade. 

As the chart below illustrates, natural gas has replaced about a third of the crude used in the power generation sector. Some are suggesting that it has been this changing dynamic which has encouraged Saudi Arabia to agree to an oil production cut; given the drop in oil needed for power generation, it may well have had to cut production anyway this year.     Saudi natgas replacing oil burn Jan 2017.jpg

3) I know that we shouldn’t focus on the U.S. rig count too much, but Friday’s print from Baker Hughes seems too impressive to ignore. Oil rigs rose by 29, the biggest jump in nearly four years, lifting them to 551. 

Permian Basin, which saw two giant acquisitions in recent weeks, saw oil rigs climb by 13. The rig count in the basin is now up to 281, more than double its low in May of last year at 134. Nonetheless, it is still half of what it was at its peak in late 2014 at 568 rigs. Permian Basin now accounts for a half of all rigs put to work in the U.S.; given improving efficiencies, it should come as no surprise that production from the leading basin is on the rise once more. 

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4) Equatorial Guinea is in talks to join OPEC. The rationale for the decision is not yet clear; the West African nation is seeing more growth from its LNG industry than it is from crude. It is already participating in the OPEC / NOPEC production cuts, agreeing to cut output by 12,000 bpd.

The country is producing around 200,000 bpd, the majority of which is exported. Our ClipperData show delivered exports were