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OPEC Production Freeze? Don’t Get Your Hopes Up

Since the start of August, Crude oil prices have risen about 15% on speculation that OPEC may agree to a production freeze coupled with a weakening U.S. Dollar (although they took a slight hit over the last few days due to an unexpected inventory build). This obviously represents a non-technical correction to the market, not supported by the fundamental driver of oil prices: supply and demand.

While Saudi Arabia, Iran, and Russia spent the last few weeks talking up the possibility of a production freeze (and making money as the price of oil rose in response), on Monday we got news that Iraq, OPEC’s second-biggest producer, said they will increase crude exports by about 150,000 barrels a day over the next few days (a 5% increase) after an agreement was reached to resume shipments from three oil fields in Kirkuk.  In addition, according to ExxonMobil, the Iraqi government has asked foreign oil companies to increase oil output and exports this month ahead of the much anticipated informal OPEC meeting in September.

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The Week In Numbers for the Week Ending 8-19-2016

Each week, we strive to provide you a bare bones summary of what happened to the price of WTI, Natural Gas, and Brent Crude. In addition, we summarize the major reports from Genspace, API, and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on August 15, 2016: $44.74WTI as of 12:00 PM on August 19, 2016:$48.20  Brent Open on August 15, 2016: $47.14Brent as of 12:00 PM August 19, 2016:$50.60  Natural Gas Open on August 15, 2016:$2.565NG as of 12:00 PM on August 19, 2016$2.598

 

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Short Takes For Week Ending August 12, 2016

Hedge Fund Increase Net Long Positions

Crude has rallied a bit over the last two weeks. Hedge funds increased their combined net long position in NYMEX+ICE WTI by +18 million bbl to 98 million bbl in the week to Aug 9. Long positions rose +19 million bbl while shorts positions were up by +1 million bbl. The increase in long positions was the largest one-week increase since Jan 2016 and before that Jan 2015.

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Where was CAPEX Cut the Most?

wood mackenzie

In one of our recent articles, we reported that oil and gas companies have reduced planned spending through 2020 by a whopping $1 trillion USD. (See also http://www.cnbc.com/2016/06/15/global-oil-industrys-retrenchment-tops-a-staggering-1-trillion.html).   This number is staggering and is made up of project cancellations and delays, internal cost cutting, and workforce reduction. In addition, in our earnings summary from big oil, we discussed flat CAPEX budgets for next year as currently projected by most major oil companies.

But who got hurt the most? Wood Mackenize (www.woodmac.com), reported this week, for example, that North Sea CAPEX has been cut by a whopping $55 Billion USD.   They also created the map below which shows where the money has disappeared from so far:

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Ty’s Take for Week Ending August 19, 2016

This was a great week for the price of oil, marked by two major occurrences that allowed a bull rally. As of Thursday, West Texas Intermediate (WTI) had gained 11.15% over the last five days of trading. Obviously, the large inventory draw (see By The Numbers) helped. But the two major occurrences were the rumor mill of production freeze and a weakening U.S. Dollar.

The Federal Reserve’s Open Market Committee had their meeting this week and there appears to be considerable disagreement over whether or not the Fed should raise interest rates. In light of recent a recent weak jobs report, and awaiting evidence that U.S. inflation is now under control at the preferred level of 2% per year, several members of the committee argued against raising rates, while several members argued for an immediate raise in rates. Either way, this allowed some softening of the U.S. dollar, which is obviously good for oil.

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OPEC Flirts With Production Freeze

Oil rallied this week based on talks of a possible production freeze by OPEC. . Saudi Energy Minister Khalid Al-Falih stated “We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course, in cooperation with OPEC and major non-OPEC exporters”. OPEC will meet informally in Algeria in September.

Russia later confirmed that they are willing to consider a production freeze as well.   While markets reacted positively, one must remember that this is not the first time OPEC and non-OPEC exporters have meet to consider a production freeze. In fact, previous efforts to freeze production occurred at OPEC meetings in November 2014, June 2015, December 2015, and June 2016, all ended in failure. Moreover, OPEC has every incentive to act as though a production freeze could happen simply to drive up the price of oil with words alone.

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The Week In Numbers for the Week Ending 8-12-2016

Each week, we strive to provide you a bare bones summary of what happened to the price of WTI, Natural Gas, and Brent Crude. In addition, we summarize the major reports from Genspace, API, and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on August 8, 2016:

$41.99

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Ty’s Take for the Week Ending 8-12-2016

OPEC’s Role in Oil Prices.

This week we saw just how volatile the oil markets are and how subject to every whim they can be. Towards the beginning of the week, we saw minor OPEC members indicating that OPEC may take another shot, informally in September, at agreeing to market stabilizing measures. This took the price of oil up. On Thursday, these sentiments were echoed by major OPEC member Saudi Arabia, again having a positive impact on oil prices.

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Short Takes For Week Ending August 12, 2016

us crude oil exports

Hedge Fund Short Covering Probably Accounts for Recent Rally

Crude has rallied a bit over the last two weeks. Hedge funds and other money managers accumulated the equivalent of 374 million barrels of short positions by August 2, 2016 in WTI and Brent. There has been comparatively little change in hedge fund long positions over the same period. This has left oil prices vulnerable to sharp reversal if prices stop sliding or hedge funds try to lock in some of the profit.

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Changing Demand For Natural Gas

air conditioning demand graph
natural gas consumption
natural gas fired capacity

In By The Numbers for the August 05, 2016, we wrote about an interesting occurrence: a natural gas inventory draw during the middle of summer.

As we noted in the August 5, 2016 Newsletter, U.S. natural gas stocks fell 6 bcf for the week before to 3,288 bcf. This was highly unusual as we are in the middle of injection season so stock should be growing, not shrinking. Normally, we would see an increase this week (based on a five year average) of 54 bcf. In fact, this was the first summertime draw of natural gas in over a decade.

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