OPEC & NOPEC cut a deal

Dec 12, 2016 12:18:17 PM EST

And crude is full of the festive spirit, merrily skipping higher today in response to the result of the weekend's OPEC / NOPEC meeting. As the number of global oil producers committing to participate in a production cut continues to rise, hark, here are five things to consider in oil markets today:

1) While it was not surprising to have Russia affirm their commitment to cut production by 300,000 barrels per day, in similar fashion to the OPEC meeting, it has been fascinating that so many others have been so willing to commit also. Even Malaysia has said it will cut production by 20,000 bpd, while Brunei has committed to 4,000 bpd. (These are the only Asian nations to commit to the non-OPEC deal). 

The chart below shows Russian waterborne exports. Given that shipping by pipe is the cheapest way to transport crude, we are likely to see lower Russian production reflected in waterborne deliveries first, as the more expensive method is cut. (Hark, Russian waterborne export loadings, below).

Russia exports.png2) Oman has contributed to the NOPEC production cut as expected, signing up for 40,000 bpd to be trimmed, while even Kazakhstan, who has just started ramping up commercial production at the Kashagan field, has committed to a 20,000 bpd cut (16 years after its discovery, and over $50 billion of investment later...), although this was under some duress apparently.  

With commercial production ramping up at Kashagan in the last month, combined with flows from Kazakhstan's Tengiz field, loadings of Kazakhstan's CPC blend at the Russian Port of Novorossiysk have risen to their highest level for the year:

Kashagan flows ClipperData Dec 2016.jpg

3) While some countries are purposefully cutting production, other countries are allowed to consider natural declines as a production cut. (No, really). This helps explain why Mexico has agreed to cut by 100,000 bpd, and Azerbaijan by 35,000 bpd.

In terms of compliance, there will be a five-country compliance commission set up, with three representatives from OPEC (Venezuela, Algeria and Kuwait), one from Russia, and one other NOPEC member. 

The last bit to mention in relation to the weekend's meeting is a comment from Saudi's oil minister, Khalid Al-Falih:  'I can tell you with absolute certainty that effective January 1 we’re going to cut and cut substantially to be below the level that we have committed to on November 30'.

This admission is remarkable, and further affirmation of Saudi's fervent desire to balance the market. This declaration also comes amid rumors that Saudi Arabia's production reached a new record high in November - something we await to be confirmed in Wednesday's monthly Oil Market Report from OPEC.

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4) The chart below draws attention to what we should expect from the latest bullish OPEC / NOPEC news: higher prices translating to increasing drilling activity in the U.S. Friday's Baker Hughes data already shows oil rigs rose by 21 last week, the biggest jump since January, and to the highest level since July 2015 at 498 rigs. Higher prices will only lead to heightened activity. 

US production vs price.jpg

5) Finally, the latest CFTC and ICE data is not surprisingly showing speculators such as hedge funds piling into long positions last week, in the aftermath of the OPEC meeting. Long positions for combined futures and options in both New York (CFTC) and London (ICE) showed their biggest jump since August - a record in itself.

Long positions increased by 45 percent last week to 275,763 contracts; this leads us to expect that we could very well see the highest net long position since mid-2014 in next week's data.  

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About the Author

Matt Smith

deciphers and distills what is most relevant across the energy complex into cohesive and pithy knowledge you can use. The belly laugh is a bonus.

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