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Oil Update–November 2016

Those of us who follow oil know that at the end of November, OPEC will hold a meeting and will decide whether to follow through on its Algiers commitment to reduce members’ oil production. Most articles in the major financial newspapers indicate that many analysts, traders, and speculators are skeptical, if not dismissive, that OPEC will follow through. I, however, think that OPEC will announce a reduction, though I am not certain that it will be as large as many hope.

Helima Croft of RBC Capital Markets Research wrote a report, which Barron’s cited in an article “OPEC Must Strike Deal For Its Own Good” (subscription required), with the following key points:

  • Revenue is the key item for all concerned;
  • Saudi Arabia—the pivotal player in OPEC—wants a deal done for domestic reasons;
  • Because most members are at or near maximum capacity, the opportunities for cheating are constrained;
  • A sustainable increase in production for Croft’s “fragile five” looks challenging in the near term;
  • OPEC is aware of extremely adverse price and reputational risks from failure to reach an agreement; and
  • The election of Donald Trump should not dramatically alter OPEC dynamics.

I agree with all of her points.

The Wall Street Journal article “Oil Prices Await Effect of OPEC Deal” (subscription required) mentions the prices that banks expect for 2017.

Underscoring the uncertainty about the deal’s prospects, banks polled by The Wall Street Journal kept their price forecasts largely unchanged from the previous month. The 14 banks in the survey predict that international Brent crude will average at $56 a barrel next year while U.S. benchmark West Texas Intermediate will average $54 a barrel next year.

On Friday, Brent was trading at $48.54 a barrel while WTI was at $47.60 a barrel. Those prices are still down by more than half from mid-2014.

OPEC agreed in September to reduce its record output, but its members have since increased production even more, complicating its calculations for a cut. That means the nitty-gritty details of any OPEC agreement on Wednesday will be more important than usual.

The banks’ prices are likely a sweet spot—high enough to make a substantial difference in producers’ revenue while low enough to prohibit higher cost oil assets from being exploited.

For those of us interested in the oil markets, Wednesday should prove to be an interesting day.

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Autumn Leaving

It's Time To Leave

Last weekend, I shot a couple of photographs at North Glenmore Park, capturing the change in seasons; the summer leaves have left as nature prepares for winter.

For those not familiar with Calgary or its climate, North Glenmore Park is located on the north border of Glenmore Reservoir, a large man-made reservoir that is used for Calgary’s drinking water and to create electricity. Many also use the reservoir for sailing, canoeing, kayaking, and dragon boat races. People can walk or bike around the reservoir, too. If I recall correctly, it’s about 16 kilometers or almost 10 miles. For the most part, the path is relatively flat with a few hills in the Weaselhead Flats area. As a side note, the Weaselhead Glenmore Park Preservation Society works to protect this delicate area.

At this time of year, the weather tends to be variable. Sometimes there is snow. Most years, however, it is still reasonably warm at about 9 °C or nearly 50 °F for daily highs and close to freezing at nights.

As we turn our backs to the summer and autumn seasons, Calgarians are preparing for colder winter temperatures.

The top and bottom pictures were taken at about 5:50 p.m. during the “golden hour,” which is a period shortly before sunset. You can see long shadows in both photographs.

Autumn Leaving

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Oil Update–September 2016

On late Wednesday, September 28, OPEC announced an agreement of sorts to reduce its production by roughly 250 to 750 kbd to its overall combined production mbd, where kbd and mbd represent thousands of barrels per day and millions of barrels per day respectively.

The Conference, following the overall assessment of the global oil demand and supply balance presented by the OPEC Secretariat, noted that world oil demand remains robust, while the prospects of future supplies are being negatively impacted by deep cuts in investments and massive layoffs. The Conference, in particular, addressed the challenge of drawing down the excess stock levels in the coming quarters, and noted the drop in United States oil inventories seen in recent weeks.

The Conference opted for an OPEC-14 production target ranging between 32.5 and 33.0 mb/d, in order to accelerate the ongoing drawdown of the stock overhang and bring the rebalancing forward.

The Conference decided to establish a High Level Committee comprising representatives of Member Countries, supported by the OPEC Secretariat, to study and recommend the implementation of the production level of the Member Countries. Furthermore, the Committee shall develop a framework of high-level consultations between OPEC and non-OPEC oil-producing countries, including identifying risks and taking pro-active measures that would ensure a balanced oil market on a sustainable basis, to be considered at the November OPEC Conference.

This agreement is an agreement to agree, which might prove very difficult to effect. Moreover, I am not sure which, if any, OPEC countries, will be exempt from production cuts. If there are exempt OPEC countries, will their future production overwhelm the agreed cuts? Saudi Arabia typically reduces its production as the summer ends and autumn starts. Assuming this planned production cut is part of agreed cut, what is the effective production cut? If prices should rise to nearly or above $50 per barrel, will other higher cost producers step in and threaten OPEC’s market share? Until we have more clarity by way of a final agreement and see how other OPEC and non-OPEC producers respond, I will remain cautiously optimistic.

Here are some other articles, from subscription sources, that you might find helpful:

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Calgary's McDougall School Just Before Sunrise

I attended many meetings at McDougall School, at 412 – 7 Street SW, Calgary, when the oilsands industry and provincial and federal government representatives were negotiating fiscal terms during the mid to late 1990s. Because it is one of the oldest buildings in Calgary’s downtown core with a unique architecture and history, I always found the school interesting.

When it was constructed during 1906 to 1908, life in Calgary was very different. It was originally used as a school for training teachers, although it now contains offices and meeting rooms primarily used, I believe, by the Alberta government. After its construction it was likely one of the prominent buildings in Calgary. Today it is dwarfed by the many skyscrapers that occupy the downtown core. Then, horses transported people from place to place. Now, vehicles and a transit system move people about Calgary. Then, Calgary was an important hub for agricultural and ranching communities. Now, while Calgary hasn’t forgotten its agricultural and ranching roots, it is, perhaps, most popularly known as the location for the head offices for Canadian and Canadian subsidiaries of international oil and gas companies. So much has changed during the past century.

I took the above photograph at about 6:24 a.m., approximately 20 minutes before sunrise, on August 28, 2016.

For those interested in learning more about its history, please visit Canada’s Historic Places: “McDougall School.”

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Oil Update–July 2016

Last month I was concerned about Brexit and its implications for the oil market. At present, Brexit doesn’t seem to be playing an important role in the markets.

Oil recently has softened as there is a glut of refined products. With too much inventory, refineries are likely to cut back on their crude purchases. Making matters worse, according to Reuters, “OPEC oil output set to reach record high in July: survey.” Furthermore, as we enter into August, refinery utilization rates typically begin to slow as we approach the shoulder season between summer driving and winter heating. The U.S. Energy Information Administration provides a graph showing last year’s and this year’s “Crude oil refinery inputs.” Looking at the graph, we see that crude oil inputs begin to slow sometime in early August and reach their low points in late October or early November.

Now that oil prices have softened to the low $40s, we are left wondering will prices continue to fall or stabilize before heading higher again?

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Oil Update–June 2016

I am still trying to wrap my head around Brexit and what implications it might have for oil. As a consequence, I have nothing meaningful to add for June. Let’s see what the next few weeks bring.

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Oil Update–May 2016

I am surprised by the strength of oil prices. As I type this post, West Texas Intermediate is flirting with $50, skirting a few pennies above or below.

Of course, the recent turmoil Africa, especially Nigeria, and the wildfires in northern Alberta have hampered oil supply. With forest fire no longer a serious threat to Fort McMurray or oilsands production facilities, companies are in the process of restarting their production, so this shortfall shouldn’t last much longer.

The next shoe to drop might be Venezuela. As we know, the country is experiencing severe difficulties, and that’s putting it mildly. Many are wondering if the country will completely collapse, and, if so, what that development might mean to its production.

OPEC has its next meeting this week on June 2. Given the rivalry between Iran and Saudi Arabia, I don’t expect any changes in OPEC’s position.

I am waiting and watching to see how some developments play themselves out. Does Nigeria continue to get worse? How long until Alberta production resumes normal levels? Will Venezuela be the next crisis? Does OPEC do anything unexpected? And how does the oil industry react to these higher price levels? Wrapping up, there’s just more continued uncertainty.

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Oil Update–April 2016

This is yet another installment on the latest oil price movements.

The Doha pow-wow turned into a non-event as Saudi Arabia at the last moment pulled the plug on any potential deal, stating that in order for there to be a deal, Iran must be included.

The Doha failure surprised me because I thought there was no downside and only upside. All represented countries were at or near maximum capacity, so landing on a deal would not have made any significant difference to their production levels. Yet, if a deal had been struck, that action might have added more confidence to an oil rebound.

Even more surprising to me was the oil price reaction after the Doha failure. Oil has been remarkably strong during the past two weeks. John Kemp at Reuters suggests in his article “Oil rally is not just about hedge funds” that oil prices are becoming dangerously overheated. We will discover soon whether recent prices are warranted.

At this point, I am skeptical of oil rising much further or falling back close to prior lows in the near term.

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Oil Update–March 2016

As a follow-up to my February post regarding oil prices, I am still not optimistic about a quick recovery.

As we have seen, there was no March meeting for OPEC and some non-OPEC countries to agree to a production freeze. Now, the latest plan is for those countries to meet in the Qatari capital of Doha on April 17. Assuming that the meeting does proceed and that they do agree to a production freeze, I am unsure of the benefits. That agreement would just freezes oil production at or near maximum levels. In other words, the world would remain awash in surplus oil.

Compounding the problem, according Janet Yellen’s speech yesterday (New York Times—a subscription might be required), global economic growth remains sluggish.

While I remain skeptical of a quick recovery, I am hopeful that oil prices won’t fall much further.

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Oil Update–February 2016

In December of 2015 I indicated that I was no longer confident that oil would not remain in the US$30s for more than two months. Well, now that we are at the end of February 2016, we see that oil has remained in the US$30s and even briefly sunk lower.

The question now is, where will oil prices go from here? Unfortunately, I am not optimistic about a quick recovery. I have been following as closely as possible various news articles related to oil. Some members of OPEC plan to convene a meeting by mid-March in hopes of achieving a production freeze. Because I doubt that Iran will agree to a freeze as it ramps up its production back to pre-sanction levels, I am doubtful that OPEC and others will agree to a production freeze. Even if they were to agree, with or without Iran, I am not sure that it would have much effect. The world is still awash in oil. And as we have seen in recent weeks, prognosticators seem to be lowering their price forecasts. Moreover, there is still considerable uncertainty about the strength of the global economy and its desire for more oil.

I want to wait for a few more months to see how world oil production reacts to these very low prices. Do these low prices finally cause oil production to fall more precipitously than was previously expected or does oil production remain resilient?

I honestly do not think anyone has a very good crystal ball at this point. So we wait for more information.

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