A passing glance of OPEC’s role in the oil market in 2016 would lead you to believe the group is toying with it. For more than a month, Saudi Arabia, Iran, and non-OPEC Russia have been speaking out of both sides of their mouths about the possibility of a freeze. We’ve been here before.
Output freeze talks in April were vetoed by Saudi Arabia because Iran, its chief arch rival, said it would refuse to cut because it had just begun making up for lost time post-sanctions. Prior to those talks, prices spiked on speculation that a deal would be reached. History is echoing once more, as chatter about the talks later this month has added volatility to an already-volatile oil market. That’s why it is much more important now to keep our eyes open and judge the oil market by what we see, rather than by a lot of what we’re hearing.
The oil market hasn’t yet learned its lesson. Despite all the renewed chatter, the market fundamentals which drive the “oil price series” haven’t changed. At the risk of oversimplification, it seems at first glance that oil traders hinge their every response on some soundbite out of OPEC regarding the possibility (or lack thereof) of coordinated action to address oil prices. When Saudi and Russia last month announced a very preliminary, generic agreement to jointly evaluate the oil market and consider possible responses, prices rose. And then, when Iran once again insisted that it wasn’t going to cut production until it reached its post-sanctions year-end goal of 4 M/bpd, prices dipped.
And then you have OPEC’s monthly report published this week. And what is the major takeaway?
The fundamentals of the oil market that drove prices south in the first place are not meaningfully improving. This is especially true with the world supply picture.
In fact, OPEC reversed its supply outlook for non-members for next year. In its August report, the group had forecast a decline in non-OPEC production of 150,000 bpd in 2017. In the September report, the group reversed the forecast. It now predicts non-OPEC supply will rise by 200,000 bpd.
The main reason for the revision is the start-up of the huge Kashagan oil field in Kazakhstan in October 2016 (after a problem-plagued few years) that is expected to ramp up to 0.37 M/bpd. The rising U.S. oil rig count in recent weeks, a slower-than-expected contraction in U.S. tight oil production, and the start-up of Canadian oil sands operations following last Spring’s wildfires, also prompted the group to predict higher non-OPEC production in the second half of 2016 than previously expected.
OPEC reported that oil inventories on developed countries remained 341 million barrels above their five-year average in July. In coming months, OPEC still holds that stronger demand in major consuming nations will diminish this surplus in coming months.
“This, along with a potentially improving supply picture, would contribute to a reduction in the imbalance of market fundamentals,” OPEC said.
“Potentially improving”- that’s the key qualifier here, with the emphasis on “potentially.”
In response to OPEC’s upwardly revised forecasts for non-member production, the group cut estimates for the amount of oil it will need to produce in 2017- by 500,000 bpd to 32.5 M/bpd.
OPEC maintained its previous estimate for global oil demand, projecting that consumption will rise by 1.15 M/bpd in 2017 to average 95.42 M/bpd. Growth in India, China and the U.S., is the main factor in this estimate.