No matter which data aggregator you rely on, OPEC’s 11 out of the 14 members who have signed up to oil production cuts are delivering on their promise of a gradual 1.3 million barrels per day (bpd) reduction.
In fact, an aggregation of projections from Bloomberg, S&P Global Platts, OPEC secondary-sources and the International Energy Agency (IEA) point to the cartel’s compliance actually being as high as 106% of their target.
The collective pledge of a 1.8 million bpd cut inked with 10 non-OPEC producers, including Russia, all the way up to March 2018, is not quite there yet simply, because the non-OPEC participants’ compliance languishes in the region of 86%.
Undeterred, the Saudi lowering of output continues. OPEC’s largest producer cut its production down to 9.93 million bpd in May, down 40,000 bpd April, according to S&P Global Platts; that’s way better than Riyadh’s quota allocation of 10.058 million bpd under the OPEC and non-OPEC agreement of 25 May.
Furthermore, Saudi Oil Minister Khalid Al-Falih has said he will consider the need for deeper output cuts in July. “If for some reason we need to do more, we will consider to do more including [an] extension, and bigger cuts. Nothing is off the table but today nothing is on the table either.”
Of course, given high inventories and rising US production – few view the move as having the desired impact on oil benchmarks, as both Brent and West Texas Intermediate have dabbled with a technically bearish market in the past few weeks.
There is another subtle point here – OPEC is visibly fretting about losing market share. According to ClipperData, a vessel tracking outfit, US imports from Saudi Arabia averaged around 1.1 million bpd in April and May, down from 1.34 million bpd. However, ClipperData believes there has now been a “fairly widespread rebound” in June cargo loading.
Along with the Saudis, ClipperData finds loadings from United Arab Emirates, Iraq and Angola to be rising as well. It can only mean one thing – the cartel is once again getting spooked about its market share. If non-OPEC takes up OPEC’s oil market share the pressure on crude prices will actually aggravate.
There have been seven periods in history when OPEC lost market share and oil prices fell during most of the periods, according to analysts at Morgan Stanley (see chart below).
Martijn Rats, head of Oil & Gas Research team at the investment bank, says, “Seaborne oil exports accelerated globally in May, driven by both non-OPEC countries as well as OPEC countries exempt from quotas. This suggests that production cuts by OPEC-11 are increasingly coming at the expense of market share. When that happens, history shows that oil prices usually weaken.”
OPEC production cuts, Rats adds, are most effective when they accelerate a rebalancing that is already taking place. However, that does not seem to be what is happening.
Furthermore, most of my contacts on Wall Street, concur that OPEC suffered from a self-inflicted wound courtesy chatter about extending its productions for much of 2017, before it eventually did so in May, but not before allowing several U.S. shale producers to hedge at $45 per barrel 12 to 18 months out.
The IEA, U.S. Department of Energy and indeed many analysts reckon such hedging strategies could ensure US production would be well in excess of 10 million bpd in 2018. And the US is not the only non-OPEC hub where production is rising, as far removed from those signatory – at least on paper – to the OPEC and non-OPEC producers’ agreement.
“Additionally, when OPEC cuts production, it also builds spare capacity, which becomes an overhang for oil markets. We see oil markets not far from balanced, but expect that upside is capped by high inventories in 2017. A possible confluence of strong shale growth and the end of the OPEC agreement in 2018 puts further pressure on prices into next year,” Rats concludes.
Lower OPEC market share or higher OPEC production, whichever way you look at it, bearish sentiment is not dissipating any time soon.
Remaining net-short is the logical conclusion for me. Some expect market rebalancing to be on the horizon; I am more inclined to think if higher US production is reflected in official data – there could well be one hell of a market slump.