OPEC's 104% solution

April 12, 2017 08:15 AM

How do you get rid of an oil glut? How about a 104% solution? OPEC reportedly not only adhered to their agreed upon production cuts, but in March their compliance rate came in at an astounding 104%! Russia also vowed to be 100% complaint by the end of the month, shocking most of the OPEC watching world.

This comes as Syria and North Korea are raising the geopolitical risk factors for oil. If that is not enough risk for you, then how about the news that the wild man with the dirty windbreaker jacket wants to make a comeback. Iran's former President Mahmoud Ahmadinejad unexpectedly filed to run in the country's May presidential election because I think he is a bit jealous that Kim Jong-un has taken the title as the world’s biggest nut-job.

Let’s talk OPEC first. OPEC agreed to lower their production to 29.804 million barrels a day. Yet, it seems that according to a Reuters report, they are producing 29.757 barrels a day. The report came on the same day that Saudi Arabia said they are in favor of extending production cuts and Russia vowed to be 100% compliant with their share of the non-OPEC cuts. Russia has agreed to cut by 250,000 barrels. The Russian Energy Minister Alexander Novak insisted that that Russia will deliver 100% of its agreed upon cuts by the end of the month if not sooner. Other non-OPEC players are also showing better compliance.

This is a strong sign that OPEC and non-OPEC are doubling down on cuts at a time when geo-political risk is rising and global inventories are starting to fall. It seems that the players in OPEC/non-OPEC accord are not so worried about the rise of the shale players even as the Energy Information Administration (EIA) predicts that the U.S. is going to be producing a lot of oil. The EIA says that, “U.S. crude oil production is expected to be higher during the next two years than previously forecast, with annual output in 2018 now forecast to reach 9.9 million barrels per day, exceeding the previous record level of 9.6 million barrels per day reached in 1970.”

OPEC and non-OPEC producers know that shale oil is not is going to save the day soon as changes in the market place and seasonal demand is just starting to kick in. The increase in output is still short of what the producers are taking off. That is why Saudi Arabia said that they are in favor of extending output cuts for another 6 months. The meeting to make the extension official will be May 25 in Vienna.

This comes as supplies are tightening, The American Petroleum Institute (API) reported that U.S. crude supply fell by 1.3 million barrels last week. According to their data, that would be the second week in a row that crude supply fell. The Energy Information Admintation (EIA) had a different read last week by reporting an increase. If the EIA catches up with the API we could be in store for a bigger than expected draw when they release their data today.

Oh, but for the average American, it is gas prices that are on the rise as the inventories fall. The API reported that gasoline inventories fell by 3.73 million barrels last week marking the eighth drop in a row. Refiners will have to ramp up as demand is strong and they must get summer blend built back up. Distillate inventories also fell by 1.58 million barrels giving more support to the complex. The EIA said that, “Even though gasoline prices this summer are expected to be 10% higher than last year, U.S. highway travel and gasoline demand are expected to increase. More expensive crude oil is the main contributor to higher gasoline prices at the pump this summer.”

We get the natural gas report today and natural gas is falling ahead of what should be a 7 bcf increase in supply. The EIA reported that, “The amount of electricity generated from natural gas this summer is forecast to be lower than last summer, reflecting higher natural gas prices. Most U.S. consumers would see lower electricity bills this summer if actual temperatures are close to the forecast below-normal levels. Even though retail electricity prices are expected to be higher this summer, forecast milder weather could result in lower electricity expenses for the average household, but temperatures often vary significantly from forecasts.”

Coal is coming back as the EIA says that, “U.S. coal production is expected to rise this year due in part to expected higher coal-fired electricity generation. Hydroelectric generation this summer is expected to be up compared to last summer, reflecting recent high precipitation along the West Coast, the nation’s leading region for hydroelectric capacity.” 

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.