OPEC+ found a deal ; Russia is taking it slowly ; uncertainty remains high

Russian crude oil – Weekly bulletin #4

Price movement

Oil prices were down on 4th December, as OPEC failed to give the market a clear signal regarding production cut, and whether Russia would be on board as well, should one be implemented.
Moreover, the USA as well are not helping the situation. Trump tweets stating that “the World doesn’t not want or need higher oil prices” and claiming America’s energy independence since, for the first time in 75 years, USA has become a net exporter of oil. The American Petroleum Institute (API) reported a huge crude oil inventory draw 10.18 million barrels for the week ending December 7, compared to analyst expectations that we would see a draw in crude oil inventories of 2.990 million barrels.

Qatar announcement of departure from the OPEC cartel, stating that its interest were no longer aligned with the other Persian gulf countries, probably had a significant impact on the Dubai benchmark which recorded a five dollars (-8%) drop in a day.
However, on December 7th, OPEC and OPEC+ managed to find an agreement on oil production cut – approximately 800,000 bbl/day for OPEC and 400,000 bbl/day for OPEC+. This announcement led to a small increase in most oil markets.

Supply and demand dynamic

The group of non-OPEC countries is expected to reduce production by 400,000 barrels a day, but Russia is to do its share only gradually over the next few months starting with initial cuts of 50,000 to 60,000 b/d, this is significant because Russia is the main player in the non-OPEC cohort. Therefore the cut may not be reached in due time.

Nonetheless, Russian Energy Minister Alexander Novak said on Tuesday that Russia hoped to achieve its goal of reducing oil production by 228,000 b/d, or 2%, in line with the reduction agreement of OPEC production within four months.

Russia has pledged to gradually reduce production, as freezing winter temperatures make rapid reduction difficult. The group is scheduled to meet in April to review the progress of the transaction.
Nearly a week after the OPEC+ agreement, confidence in the effectiveness of the deal is already becoming fragile.

Reccomendation for the future

Surplus supply could be further eliminated by unforeseen interruptions. Libya has just lost 400,000 bpd due to invading militias, according to the National Oil Corp. Venezuela and Iran are also expected to continue to lose production as they are still under US sanctions and meanwhile Nigeria remains under geopolitical risk. Unlikely events that could quickly erase any excess supply.

However, the oil market is not convinced that the OPEC+ cuts will be enough to raise oil prices significantly, despite the initial euphoria surrounding the Vienna agreement. There are also some other factors that could make the market saturated. Rips in the global economy are growing, the demand leads to some signs of tensions and the supply is still rising as US continue producing and Qatar is to be independent.

Despite an hectic past couple weeks, future curves show a slight contango and we are recommending investing long for the next six months.

Sources :
‘Brent Futures Curve’. ERCE. Accessed 11 December 2018. https://www.erce.energy/graph/brent-futures-curve.
‘Crude Oil Futures Trade Higher on API Data, OPEC Cuts | S&P Global Platts’. Accessed 13 December 2018. https://www.spglobal.com/platts/en/market-insights/latest-news/oil/121218-crude-oil-futures-trade-higher-on-api-data-opec-cuts.
‘Oil Prices Head Higher After API Reports Huge Crude Draw’. OilPrice.com. Accessed 11 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Oil-Prices-Head-Higher-After-API-Reports-Huge-Crude-Draw.html.
‘Opinion | Why Is Qatar Leaving OPEC? – The New York Times’. Accessed 10 December 2018. https://www.nytimes.com/2018/12/10/opinion/qatar-leaving-opec-saudi-arabia-blockade-failure.html.
‘President Trump Throws Hail Mary Tweet On Eve Of OPEC Meet’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/President-Trump-Throws-Hail-Mary-Tweet-On-Eve-Of-OPEC-Meet.html.
‘Russia Will Cut Oil Production By 60,000 Bpd In January’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Russia-Will-Cut-Oil-Production-By-60000-Bpd-In-January.html.
‘Russia’s Oil Production Cuts To Take Months To Implement’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Russias-Oil-Production-Cuts-To-Take-Months-To-Implement.html.
‘Russia’s Oil Production Dips As Possible Production Cuts Near’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Latest-Energy-News/World-News/Russias-Oil-Production-Dips-As-Possible-Production-Cuts-Near.html.
‘Urals-Brent Price Difference’. Neste worldwide, 19 February 2015. https://www.neste.com/corporate-info/investors/market-data/urals-brent-price-difference-0.
‘Why The OPEC+ Deal Won’t Cut It’. OilPrice.com. Accessed 13 December 2018. https://oilprice.com/Energy/Crude-Oil/Why-The-OPEC-Deal-Wont-Cut-It.html.

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