Will Opec deliver its output cut deal?
London/ New York: The promise of production cuts from Opec and its partners sent oil rallying in 2016. Now traders want proof they’re delivering on those vows. It won’t come easy.
The challenge: building a coherent picture from the morass of data that emerges at each step along the process, from the wellheads where the oil is produced, to the tankers that carry it, and the depots that store it.
Unlike in the US, where output is published weekly, members of the Organization of Petroleum Exporting Countries, Opec, can take months to disclose their production. Beyond that, their data can be at odds with independent surveys, and countries have been known to cheat on such deals. With a rising US rig count offering a bearish undertone, each new hint on the accord’s implementation can be expected to swing prices.
“The market could be whipsawed more by data and headlines than in the past,” said Michael Cohen, head of energy commodities research at Barclays Plc in New York, in a telephone interview. “Data lags will be the primary problem in tracking cuts.”
Brent crude, the global benchmark, has surged 23% since 29 November, the day before the deal was sealed among Opec’s members. The grade was trading at $56.86 a barrel at 1.07pm in Singapore. Future price increases for crude future will depend on a wide variety of signposts. Here’s a breakdown on what to look for:
The first indications will come at the start of next month, when media outlets such as Bloomberg, Thomson Reuters and Platts publish surveys of production. Estimates from institutions such as the International Energy Agency and US Energy Information Administration arrive a week or two later.
As “no one’s counting barrels at Abqaiq,” the Saudi oil-processing facility, these have to be modelled on computers, Barclays’ Cohen says. “While we consider official production data published by Opec governments, we come up with our own estimates,” said Lejla Villar, an analyst who estimates Opec output at the EIA, part of the US Energy Department. “We look at crude oil loadings, estimated domestic consumption and refinery runs, storage, and whatever else might be relevant.”
Opec won’t publish production levels until the middle of next month. Even then, the waters will be muddied as the organization provides two sets of data: the one used to monitor the agreement, compiled from the surveys described above, and numbers submitted directly by member governments, which can differ significantly.
Monitoring the 11 non-members collaborating in the deal could be even harder, as data for the smaller producers like South Sudan and Equatorial Guinea are very patchy.
“At the moment it’s hard to be sure how much announced production cuts have been followed or matched by actual changes,” said Damian Kennaby, director in the oil markets team at IHS Markit Ltd, whose estimates are among the external ones used by Opec. “There are very few data on current production numbers and balances.”
To provide more clarity, Opec and its partners have established a monitoring committee, to hold its first meeting in Vienna from 21 January to 22 January, though the panel hasn’t yet said ind detail how it will operate.
While the agreement applies to production, changes in exports will be felt more acutely by the international oil market. National producers notify customers months in advance what cargoes are available, which means some details on exports are already known. Iraq’s shipping schedules, for instance, show the country’s sales will increase rather than decrease next month, though the country subsequently said buyers should prepare for lower volumes.
Once the oil is on the water there’s a range of services dedicated to following its flow, from ship-tracking data compiled by Bloomberg to companies such as Petro-Logistics SA and Oil Movements. Satellite-tracking means these shipments can be estimated almost in real-time.
Still, a drop in exports might not guarantee a change in production, according to the EIA.
“The question of storage is the key unknown when estimating production using export data,” said the EIA’s Villar. “It’s difficult to know how much of the lifted crude each month comes from storage and how much from production in that particular month.” Furthermore the size of the cuts, at just 4% of Opec’s total output, “is not necessarily enough to have an impact on the number of tankers,” said Olivier Jakob, managing director at consultants Petromatrix GmbH.
Clearing bloated oil inventories, rather than achieving a particular price, has always been the stated aim of Opec’s intervention. The group estimates that the world’s tanks are overstuffed by more than 300 million barrels, or enough to satisfy China for almost a month.
Yet if stockpiles are the most important metric, the problem is that they are perhaps the most lagging, with data from the IEA arriving about two months in arrears.
The agency previously assumed inventories wouldn’t drop until the end of 2017. It now estimates that Opec’s cuts could start to deplete inventories as early as the first quarter, which means data from this definitive gauge would arrive in April or May. Opec, meanwhile, has said that while the deal will speed up the re-balancing of the global oil market, it won’t result in demand exceeding supply until the second half of the year.
Even if Opec delivers the cuts promised, there’s still the risk of backsliding if their competitors in the US respond by ramping up drilling, said Chip Hodge, who oversees a $12 billion natural-resource bond portfolio as senior managing director at John Hancock in Boston.
“If activity picks up dramatically here, it might push other producers into cheating because of what that means for prices,” he said. Bloomberg