Anniversary not happy: our oil markets on the way before the OPEC meeting


Next week will mark the third anniversary of OPEC's Thanksgiving Surprise, our name for the day after the Thanksgiving holiday that year when the cartel decided it would not make production cuts to compensate for the growing production of United States and balance the world oil markets. That decision was the "shot heard around the world" in the oil price war that sent industry into the most severe recession since the early 1980s.

OPEC is scheduled to meet on November 30 , the last meeting of 2017 when you decide to expand the current production quotas or make cuts.

Connoisseurs remain optimistic, maybe too much. Recent moves above $ 55 per barrel for West Texas Intermediate (WTI) have some of my friends in the industry hoping that happy days will return soon. The hope is strong that they can only see one more oil boom that allows them to retire (the real oilmen never really retreat, by the way).

Enough to talk, let's look at the data and trends.

Price of oil trend or simply speculation?

As of October 30, 2017, the average annual price for futures close to the WTI month was $ 49.58 per barrel. In November, the reference price seemed to have found support at $ 50 per barrel and on November 6, broke the resistance at $ 55 and is testing a higher support level at that price. On November 14, the short-term futures price for WTI closed at $ 55.70 per barrel and WTI averaged $ 56.16 so far this month, or 13% more than the annual average through October.

The recent rebound in the price of oil is indicative of a turning point and that the long-awaited upward trend has arrived?

We believe that this possibility is unlikely. [19659005] Inventories

On the positive side, it is a bullish signal that the US crude oil stocks UU They have established a downward trend since March 2017, but they remain high by historical standards. On November 10, 2017, US crude stocks UU They reached 459 million barrels of oil, down from 490 million barrels last year, but still 42.1 million barrels above the five-year average. In addition, supply days have decreased to 28.3 days on November 10, 2017, compared to 31.2 days in the previous year.

If current trends persist, we can see that the production of EE. UU reaches 10 MMBopd in 2018, leading to US oil exports UU to new maximums.

OPEC crude stocks have also shown a downward trend. OPEC reported in its Oil Market Report of November 2017: "The excess surplus has decreased considerably, with the difference of the five-year average reduced by around 183 million barrels since the beginning of this year to stand at 154 million of barrels in September. " 19659002] The downward trend in US oil inventories UU And OPEC is good, but oil storage remains well above the five-year averages, which means that the world's oil needs are well supplied.


Turning to production, the increase in the production of oil from the United States is a compensation for the upward upward trend in crude oil inventories. For the week ending November 10, 2017, the US Energy Information Agency UU (EIA) reported that US oil producers. UU They pumped at the rate of 9.6 million barrels per day (MMBopd), 964,000 barrels more than the same week last year for an increase of 10%. If the current trends persist, in Prism Investor we see that the production of EE. UU Reaches 10.0 MMBopd in 2018, boosting US oil exports UU To new maximums.

In a recent Industry Insider report, we observed how American drillers use the ridge above $ 50 per barrel to cover opportunistically more crude hedges to protect the cash flow and capital budgets for next year.

On the OPEC side of the supply equation the cartel estimated that it produced 32.6 MMBopd in October 2017, relatively flat to the 2016 average, with almost a third produced by Saudi Arabia. Profits in Iraq, Iran and Nigeria offset large declines in Venezuela.

The cartel's production discipline seems to be quite strong, and despite what frustration should be with non-OPEC producers motivated by the free market economy, we expect continued containment of the cartel.

EE. UU industry response

As we noted in May 2017, the US oil industry UU It has responded to the new era of price stability in a predictable capitalist way. As US drillers UU Increased coverage, the number of platforms has increased and the result has been increased production by completing the DUCs (wells drilled but not completed) and drilling new wells.

We anticipate that the count of EE platforms. UU It will continue to increase in 2018, boosting US production.

Global oil fundamentals

Just a few days ago, on November 14, the International Energy Agency reported that it is also forecasting growth in oil demand, but "… our changes in the growth of the Demand, which remains solid, and supply cancel each other out Using a scenario where current OPEC production levels are maintained, the oil market faces a difficult challenge in 1Q18 with a demand that will exceed demand by 600 thousand barrels per day, followed by another smaller surplus of 200 thousand barrels per day in 2Q18. "

In other words, the IEA also expects shale developers from the United States to carry out more platforms on the Permian basin and that US oil exports will continue to grow, which will be more than enough to satisfy the increasing global demand and consequently reduce inventories of crude oil.

In our opinion, what is driving the recent rise in oil prices is a combination of unfounded optimism driven by the decline in oil inventories combined with renewed geopolitical risks.

EIA reported in its short term Energy Outlook for November 7, 2017, that the fundamentals of global supply and demand have again become balanced to a large extent. Expert observers will note that striking a balance between supply and demand is only the first step in rebalancing global oil markets. As noted above, oil stocks remain high and until inventories are burned, there is no need for oil markets to send a higher price signal to the industry.

What is really happening with oil prices

In our opinion, what is driving the recent rise in oil prices Oil prices is a combination of unfounded optimism driven by the decline in oil inventories combined with renewed geopolitical risks. Rumors of a regional hot war in the Middle East began to leak in early November and on November 5, Saudi Arabia intercepted a missile fired at the capital, Riyadh, which gave credibility to the speculation. That's roughly when WTI broke above $ 55 per barrel.

The missile was launched from neighboring Yemen by the Houthi rebels, who are aligned with Iran, the archenemy of the kingdom. The attack fueled concerns that a hot war was about to erupt between the two Islamic spokesmen, which would have serious implications for the free flow of oil from the Arabian Gulf (or the Persian Gulf, depending on its political sensitivity).

Given Saudi Arabia's moderate response in the days after the missile strike, oil prices have risen to their fear-induced maxima. Consequently, we attribute the recent price rise to regional geopolitical concerns and not a sign that general sentiment has shifted to a market driven by the demand of one driven by supply.


On the third anniversary of the 2014 Thanksgiving Surprise, we do not expect another and reiterate our May thesis, that Saudi Arabia and the cartel will maintain a policy of price stability and OPEC will expand the current quotas of production.

With Saudi Aramco's IPO in 2018, increased defense spending to combat the growing threat from next door in Yemen and the need to fund its economic diversification program, the kingdom can not afford another price war with the United States oil producers. However, given the ability of US operators to rapidly increase production, it will take longer before the rising global demand exceeds the supply response of the sector, consumes high crude inventories and sets the stage for a long-term increase in oil prices. [19659002] We anticipate some profit-taking as a result of the meeting, since it is clear that the oil markets are still driven by supply and we are very far from the inventories that reach more average levels.

Disclosure: I / we have no positions in any of the actions mentioned, and I have no plans to start any positions within the next 72 hours.

I wrote this article myself, and expressed my own opinions. I'm not receiving compensation for it. I have no business relationship with any company whose actions are mentioned in this article.

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