Markets expectant but less optimistic ahead of OPEC ... - NBK.com
Economic Update 15 November 2016
Oil markets
> Omar Al-Nakib Senior Economist +965 2259 5360, [email protected]
Markets expectant but less optimistic ahead of OPEC “output cut” meeting
Chart 1: Crude oil prices
Highlights
120
about the likelihood of OPEC’s potential output cut in November. Brent
100
NYMEX West Texas Intermediate (WTI, Front month)
110 100 90
80
80
Iraq’s call for exemption from any OPEC output cut adds to the
70
70
60
60
challenges OPEC faces as it attempts to rein in rising supply.
50
50
40
40
30
30
20
20
10
10
Market optimism is also tempered by rebounding US, Nigerian and Libyan supply, but falling OECD crude stocks are a positive in the unwinding of the supply glut.
120 ICE Brent (Front month)
110 90
fell 1.5% during October to close at $48.3/bbl.
($/bbl)
Oil prices closed lower in October as markets grew more skeptical
OPEC-14 production continues to set new records, rising by 170 kb/d to
0 Oct-14
Oct-15
Apr-16
Oct-16
Source: Thomson Reuters Datastream
33.64 mb/d in September on recovering Libyan output and increasing Iraqi supply.
0 Apr-15
Chart 2: OECD commercial crude & products stocks (billion barrels) 3.5
Petroleum products
3.5
Crude
OPEC takes center stage as markets await output cut agreement in November
3.0
3.0
2.5
2.5
More than a month after OPEC’s surprise announcement that it would contemplate its first production cut in 8 years and the oil markets remain gripped by a sense of expectation ahead of the group’s next meeting at the end of November. Volatility was indeed lower in October, but judging by the decline in oil prices since the third week of the month, the omens do not look good that an agreement can be finalized by the next OPEC meeting.
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
By the 31 October, after two consecutive days of losses, Brent closed at $48.3 per barrel (bbl), down 1.5% since the start of the month. (Chart 1.) The reversal from Brent’s earlier gains in the month was stark. Indeed, during the first half of the month Brent was trading in the $51-53/bbl range, at a 12-month high, buoyed by declines in US crude stocks and in OECD commercial crude inventories (see Chart 2), before its price dropped well below the $50 level. Similarly, West Texas Intermediate (WTI), the US marker, fell to $46.8 by October’s close of play, having been as high $51.6 at one point during the month. Optimism regarding a potential OPEC deal to rein in supply began to fade after Iraq announced that it, too, should be exempt from oil production cuts due to its ongoing conflict with the so-called Islamic State (IS). Iraq insisted that the financial strain of the war precluded a cut in production and hence oil revenues. With OPEC’s second largest producer expecting to join Iran, the group’s third largest producer, Libya and Nigeria on the sidelines, it would be left once more to Saudi Arabia, OPEC’s largest producer, to shoulder a disproportionately large share of the cuts, something the kingdom has been reluctant to do.
0.0 Aug-14
Feb-15
Aug-15
0.0 Aug-16
Feb-16
Source: International Energy Agency (IEA)
Chart 3: World demand and non-OPEC supply growth (annual change, million barrels per day, mb/d) 2.5
World demand growth Non-OPEC supply growth
2.0
2.5 2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
2015
2016f
2017f
1Q16
2Q16
3Q16
4Q16f
Source: IEA
According to their 28 September Algiers communique, OPEC is looking to bring its production down from around 33.6 million barrels per day
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2016 NBK
www.nbk.com
(mb/d) at present, according to International Energy Agency (IEA) estimates, to within a range of 32.5-33.0 mb/d. A cut of 0.6 to 1.1 mb/d would indeed be sufficient, elevated global crude stocks notwithstanding, to bring the market to balance given that, according to the IEA, the surplus of supply over demand had narrowed to 0.3 mb/d in the last quarter from a high of 1.5 mb/d in 4Q15. (Charts 3 & 4.) If Saudi Arabia and its Gulf allies pare back production by the 4% they suggested at the recent technical conference in Vienna, and this is extended to the rest of OPEC excluding Iran, Iraq, Nigeria and Libya, then the market could plausibly move even beyond balance and into a supply deficit of -0.5 mb/d in 4Q16. (See Chart 4.) This scenario assumes that exempt OPEC members, with the exception of Libya, maximize production to near sustainable capacity limits and non-OPEC countries, such as Russia, do not boost their own production in the meantime. Should no output cut agreement be forthcoming at the next OPEC ministerial meeting, then producers will likely continue pumping at will to maximize market share; with demand growth expected to slow, to 0.3 mb/d in 4Q16, the supply surplus could widen to 0.7 mb/d in the same quarter. Rebalancing would once more extend into the second half of 2017 as the rate of stock drawdowns slows. The impact on oil prices would be obviously negative, as producers remain locked in a metaphorical race to the bottom. In the absence of consensus between OPEC members regarding the magnitude, distribution and policing of any proposed cuts, and the uncertain participation of non-OPEC Russia, all this remains hypothetical, however. Market optimism was also tempered in the last few days by production data indicating that not only is Nigerian and Libyan supply ramping up after a prolonged period of outages, but that US output may also be recovering after almost a year and a half of being under pressure. This would seem to be backed by increases in the number of drilling rigs, in the US and, indeed, worldwide, which is often taken as a proxy for production. The US has been steadily bringing rigs back online since May, when rig counts were down by 80% from their 2014-high at a low of 318. (See Chart 5.)
Chart 4: Balance of supply and demand (mb/d) 99
3.0
Demand (LHS) Supply (LHS) Balance/Implied stock change (RHS)
98
2.5
97
2.0
96
1.5
95
1.0
94
0.5
93
0.0
92
-0.5
91
-1.0 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16f
Source: IEA, NBK estimates
Chart 5: US crude oil production & oil rig counts 10.0
2,000 Crude production ( LHS)
9.8
Oil rig count (RHS)
1,800
9.6
1,600
9.4
1,400
9.2
1,200
9.0
1,000
8.8
800
8.6
600
8.4
400
8.2
200
8.0 Oct-14
0 Apr-15
Oct-15
Apr-16
Oct-16
Source: US Energy Information Administration (EIA), Baker Hughes
Chart 6: OPEC crude oil production (mb/d) 34
34
33
33
32
32
31
31
While the data is preliminary, it nevertheless illustrates the scale of the challenge facing OPEC oil producers, and particularly Saudi Arabia, upon whom the largest cuts will have to be borne.
30
30
29
29
28
28
OPEC production surges to a new high in September on Libyan recovery and further Iraqi gains
27
Production from 14-member OPEC broke a new record in September, climbing by 170 kb/d to 33.64 mb/d. (Charts 6 & 7.) Boosted by returning crude flows from Libya and rising Iraqi production, OPEC output in September (excluding new members Indonesia and Gabon) stood almost 0.9 mb/d higher than a year ago. Saudi Arabia, Kuwait and the UAE continue to pump at or near record levels. Meanwhile, supply from Iran continues to increase, reaching 3.67 mb/d in September. Iran has brought back online around 760 kb/d of crude supply so far in 2016, which is the fastest source of OPEC growth this year.
27 Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Source: IEA
Chart 7: OPEC production change in September (monthly change, kb/d) -40 -20
0
20
40
60
80 100 120 140 160 180
-40 -20
0
20
40
60
80 100 120 140 160 180
VNZ UAE KSA QAT NIG LIB KUW IRQ IRN IND GAB ECU ANG ALG OPEC-14
Source: IEA
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2016 NBK
www.nbk.com
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2016 NBK
www.nbk.com
Oil markets
> Omar Al-Nakib Senior Economist +965 2259 5360, [email protected]
Markets expectant but less optimistic ahead of OPEC “output cut” meeting
Chart 1: Crude oil prices
Highlights
120
about the likelihood of OPEC’s potential output cut in November. Brent
100
NYMEX West Texas Intermediate (WTI, Front month)
110 100 90
80
80
Iraq’s call for exemption from any OPEC output cut adds to the
70
70
60
60
challenges OPEC faces as it attempts to rein in rising supply.
50
50
40
40
30
30
20
20
10
10
Market optimism is also tempered by rebounding US, Nigerian and Libyan supply, but falling OECD crude stocks are a positive in the unwinding of the supply glut.
120 ICE Brent (Front month)
110 90
fell 1.5% during October to close at $48.3/bbl.
($/bbl)
Oil prices closed lower in October as markets grew more skeptical
OPEC-14 production continues to set new records, rising by 170 kb/d to
0 Oct-14
Oct-15
Apr-16
Oct-16
Source: Thomson Reuters Datastream
33.64 mb/d in September on recovering Libyan output and increasing Iraqi supply.
0 Apr-15
Chart 2: OECD commercial crude & products stocks (billion barrels) 3.5
Petroleum products
3.5
Crude
OPEC takes center stage as markets await output cut agreement in November
3.0
3.0
2.5
2.5
More than a month after OPEC’s surprise announcement that it would contemplate its first production cut in 8 years and the oil markets remain gripped by a sense of expectation ahead of the group’s next meeting at the end of November. Volatility was indeed lower in October, but judging by the decline in oil prices since the third week of the month, the omens do not look good that an agreement can be finalized by the next OPEC meeting.
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
By the 31 October, after two consecutive days of losses, Brent closed at $48.3 per barrel (bbl), down 1.5% since the start of the month. (Chart 1.) The reversal from Brent’s earlier gains in the month was stark. Indeed, during the first half of the month Brent was trading in the $51-53/bbl range, at a 12-month high, buoyed by declines in US crude stocks and in OECD commercial crude inventories (see Chart 2), before its price dropped well below the $50 level. Similarly, West Texas Intermediate (WTI), the US marker, fell to $46.8 by October’s close of play, having been as high $51.6 at one point during the month. Optimism regarding a potential OPEC deal to rein in supply began to fade after Iraq announced that it, too, should be exempt from oil production cuts due to its ongoing conflict with the so-called Islamic State (IS). Iraq insisted that the financial strain of the war precluded a cut in production and hence oil revenues. With OPEC’s second largest producer expecting to join Iran, the group’s third largest producer, Libya and Nigeria on the sidelines, it would be left once more to Saudi Arabia, OPEC’s largest producer, to shoulder a disproportionately large share of the cuts, something the kingdom has been reluctant to do.
0.0 Aug-14
Feb-15
Aug-15
0.0 Aug-16
Feb-16
Source: International Energy Agency (IEA)
Chart 3: World demand and non-OPEC supply growth (annual change, million barrels per day, mb/d) 2.5
World demand growth Non-OPEC supply growth
2.0
2.5 2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
2015
2016f
2017f
1Q16
2Q16
3Q16
4Q16f
Source: IEA
According to their 28 September Algiers communique, OPEC is looking to bring its production down from around 33.6 million barrels per day
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2016 NBK
www.nbk.com
(mb/d) at present, according to International Energy Agency (IEA) estimates, to within a range of 32.5-33.0 mb/d. A cut of 0.6 to 1.1 mb/d would indeed be sufficient, elevated global crude stocks notwithstanding, to bring the market to balance given that, according to the IEA, the surplus of supply over demand had narrowed to 0.3 mb/d in the last quarter from a high of 1.5 mb/d in 4Q15. (Charts 3 & 4.) If Saudi Arabia and its Gulf allies pare back production by the 4% they suggested at the recent technical conference in Vienna, and this is extended to the rest of OPEC excluding Iran, Iraq, Nigeria and Libya, then the market could plausibly move even beyond balance and into a supply deficit of -0.5 mb/d in 4Q16. (See Chart 4.) This scenario assumes that exempt OPEC members, with the exception of Libya, maximize production to near sustainable capacity limits and non-OPEC countries, such as Russia, do not boost their own production in the meantime. Should no output cut agreement be forthcoming at the next OPEC ministerial meeting, then producers will likely continue pumping at will to maximize market share; with demand growth expected to slow, to 0.3 mb/d in 4Q16, the supply surplus could widen to 0.7 mb/d in the same quarter. Rebalancing would once more extend into the second half of 2017 as the rate of stock drawdowns slows. The impact on oil prices would be obviously negative, as producers remain locked in a metaphorical race to the bottom. In the absence of consensus between OPEC members regarding the magnitude, distribution and policing of any proposed cuts, and the uncertain participation of non-OPEC Russia, all this remains hypothetical, however. Market optimism was also tempered in the last few days by production data indicating that not only is Nigerian and Libyan supply ramping up after a prolonged period of outages, but that US output may also be recovering after almost a year and a half of being under pressure. This would seem to be backed by increases in the number of drilling rigs, in the US and, indeed, worldwide, which is often taken as a proxy for production. The US has been steadily bringing rigs back online since May, when rig counts were down by 80% from their 2014-high at a low of 318. (See Chart 5.)
Chart 4: Balance of supply and demand (mb/d) 99
3.0
Demand (LHS) Supply (LHS) Balance/Implied stock change (RHS)
98
2.5
97
2.0
96
1.5
95
1.0
94
0.5
93
0.0
92
-0.5
91
-1.0 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16f
Source: IEA, NBK estimates
Chart 5: US crude oil production & oil rig counts 10.0
2,000 Crude production ( LHS)
9.8
Oil rig count (RHS)
1,800
9.6
1,600
9.4
1,400
9.2
1,200
9.0
1,000
8.8
800
8.6
600
8.4
400
8.2
200
8.0 Oct-14
0 Apr-15
Oct-15
Apr-16
Oct-16
Source: US Energy Information Administration (EIA), Baker Hughes
Chart 6: OPEC crude oil production (mb/d) 34
34
33
33
32
32
31
31
While the data is preliminary, it nevertheless illustrates the scale of the challenge facing OPEC oil producers, and particularly Saudi Arabia, upon whom the largest cuts will have to be borne.
30
30
29
29
28
28
OPEC production surges to a new high in September on Libyan recovery and further Iraqi gains
27
Production from 14-member OPEC broke a new record in September, climbing by 170 kb/d to 33.64 mb/d. (Charts 6 & 7.) Boosted by returning crude flows from Libya and rising Iraqi production, OPEC output in September (excluding new members Indonesia and Gabon) stood almost 0.9 mb/d higher than a year ago. Saudi Arabia, Kuwait and the UAE continue to pump at or near record levels. Meanwhile, supply from Iran continues to increase, reaching 3.67 mb/d in September. Iran has brought back online around 760 kb/d of crude supply so far in 2016, which is the fastest source of OPEC growth this year.
27 Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Source: IEA
Chart 7: OPEC production change in September (monthly change, kb/d) -40 -20
0
20
40
60
80 100 120 140 160 180
-40 -20
0
20
40
60
80 100 120 140 160 180
VNZ UAE KSA QAT NIG LIB KUW IRQ IRN IND GAB ECU ANG ALG OPEC-14
Source: IEA
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2016 NBK
www.nbk.com
NBK Economic Research, T: (965) 2259 5500, F: (965) 2224 6973, [email protected], © 2016 NBK
www.nbk.com
