Specious Argument

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.

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.

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:

• “Saudi Oil Minister Offers Hope on Output Curb at November Meeting” (Wall Street Journal);
• “Opec agrees on need for output cut” (Financial Times);
• “Opec agreement to cut oil production faces array of hurdles” (Financial Times);
• “Iraq Quarrel on Production Number Could Sink OPEC Deal” (Wall Street Journal); and
• “Why OPEC’s Prospective Deal May Not Create a Lasting Oil Rally” (Wall Street Journal).

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.”