OPEC- Where is the Bottom for Crude?
OPEC Oil Production
The common theme among traders is that OPEC is responsible for the extra supply which we have in the market. The extra supply is nearly over 3- 4 million b/d- depending on which stats you are looking at. However, before the much anticipated OPEC meeting in Vienna on Friday, the expectations are that there will be no change in oil production. The OPEC production has already dropped by nearly 33K barrels to 32.12 during the month of November. Nigeria and Libya’s production slipped by 141K and 55K while on the other hand Iraq production surged by 104K barrels. Iraq production is increasing at a very rapid pace and the country is producing nearly 4.3 million barrels b/d.
Major Threat for OPEC
The only element which will matter the most, for OPEC members is if they want to keep the united front or not. For the time being the OPEC production is well above the agreed limit of 30MBD and we do think that their production level could stay near enough 33 MBD rather than moving lower. If the OPEC members do increase their limit rather than reducing it, it will keep the new upcoming player (Iran) happy which does have a tendency to produce a mammoth amount. However, not cutting the supply, it will make a number of members very upset who are very uncomfortable with the price.
Saudi Arabia Fighting War on Different Angles
The biggest producer of oil among OPEC members, Said Arabia, has repeatedly said that they do not control the price of oil and hence there is no guarantee from them when the price will move. The country is facing extreme pressure both internally and externally. It is fighting a war with its neighbor countries and this is drawing down their currency reserves. Internally, the Saudis are on the path to announce major structural reforms so that they do not have to rely solely on their currency or foreign reserves to keep the price of oil where it so that they can drive the non opec production dry.
Also the country is under pressure to maintain its currency peg to the dollar, but we do think that this peg is under major threat. Any further decline in the oil price will put more strain on this peg and we could see it vanishing next year, if the slide in oil price intensifies further. It is also important to keep in mind that in the past the country has suffered from massive budget deficits, and they are not going to be afraid of facing the same situation again as long as they are sure that their policies are working.
Iran Ready to Pump
OPEC members are undoubtedly concerned about the production, which is going to hit the market soon the sanctions will be lifted on Iran and how much it is going to push the supply equation higher. We already know that Iran is set to produce 500K MBD, but we believe that this is already priced in the market. What really will matter at this time will be, if Iran delivers more than they have promised or if sanction show that the country does not have the infrastructure in place to produce the levels which the country is targeting.
We believe that it will be extremely hard to put handcuffs on Iran’s production and OPEC will not have much say in the country’s production. Especially, when the current members are already not obeying their own rules. Even if they do obey their rules, the situation will be still challenging for Iran as the country has been starving for their oil cash which they will generate by selling it.
Impacts on US Producers
The US oil producers hedged their prices back in 2014 for their 2015 production, however the situation is not same this year as only 7 out of 23 have hedged 50% of their estimated 2016 production. They are wary about the weakness of the price and taking extreme precautions with respect to this.
Places to see for Bottom
In order to find the bottom for oil price there are two clear areas which can provide us a very clear indication if the demand is going to pick up and price war is going to finish. Firstly, it is the Chinese oil supply by the producers where countries are introducing heavy discount to keep their market share. Saudi Arabia has once again gained the top spot in this arena by selling most amount of oil followed by Angola occupying the second spot. Russia, which was at number one has slipped to number three. So, as long as the price war continues in this market, there will be a little change in fundamental value, which could impact the longer term curve.
Finally, it is the ISM manufacturing and industrial production data for the US, China and Eurozone which has been lack luster, especially the US. The ISM manufacturing data released yesterday for the US was extremely bad and if manufacturing is not picking up there, we have very little hope of any meaningful change in the demand equations. Although, for the eurozone, for China, this data is picking up some sign of life as their central banks remain committed for more stimulus packages.