Wax on, wax off; oil prices are rallying after selling off for the last three days, egged on by yesterday's supportive inventory report and and the ebb and flow of OPEC hope. Hark, here are five things to consider in oil markets today:
1) I hope you are sitting down for this statistic, for it is more nutty than, well, let's not go there. Our ClipperData show that exports from OPEC's 14 members last week reached a record pace of 29 million barrels per day. Not only is this statistic fascinating, but so is the driving force behind it: Saudi Arabia. Its exports ramped up to 8.4 million barrels per day last week, the highest level on our records.
All the while, Libyan exports in October are more than double last month's pace at >400,000 barrels per day as production returns, while Nigerian exports have rebounded from their monthly low for the year in September, to their quickest pace since April. OPEC surely faces an insurmountable task at its meeting next month.
2) With Iraq joining ranks with the likes of Iran, Libya, Nigeria and Venezuela in expecting exemption from any OPEC production cut at next month's meeting, the weight of responsibility continues to grow on Saudi Arabia's shoulders, and its Gulf state comrades (UAE, Kuwait and Qatar).
OPEC agreed to cut production to 32.5 - 33 million barrels per day in Algiers last month, with production from the cartel at 33.4mn bpd in September. Just as we wrote immediately in the aftermath (via a Top Gun analogy), Saudi are going to have to do the heavy lifting for a cut.
This sentiment is echoed in the below chart, as the worse case scenario appears to be playing out for OPEC's largest producer. Not only are five cartel members pushing for exemption from production cuts, but four of them - Libya, Nigeria, Iran and Iraq - are currently increasing the amount of oil they are putting onto the global market.
3) Yesterday's inventory report was a bit of a head-scratcher. While the Gulf coast saw a solid build to crude inventories, draws in the Midwest and on the West coast ultimately resulted in a 550,000 barrel draw on the aggregate.
As implied demand rebounded strongly for both gasoline and distillates on the prior week, we saw draws to both. East coast (PADD1) gasoline inventories, however, saw a 2 million barrel build. After the Colonial pipeline outage in early September caused stocks to be swiftly drawn down (especially in the Southeast), inventories have rebounded strongly in the last month or so, aided in no small part by ongoing sturdy imports. After yesterday's build, East coast inventories are now at a record for the time of year:
Wood MacKenzie highlighted earlier in the year that conventional oil discoveries are at their lowest in 70 years. The chart below left highlights the ongoing decline in oil discoveries by oil majors, as they fall with lesser spending (chart below right).
Despite the cost-cutting, an increased focus on efficiencies is meaning companies are producing more (oil) for less (investment), by drilling more efficient wells and shrinking the time it is taking to start production from new projects.
5) Finally, the chart below shows how global refining margins dropped 42 percent last quarter. After refiners made out like bandits in recent years amid tumbling oil prices and rising product demand, a global glut of crude has slowly been refined into a glut of products.
As stockpiles rise and profitability shrinks, refiners are seeing revenues dwindle. It is estmated by BP that every $1 decline in refinery margins equates to pretax earnings falling by $500 million per year. U.S. refiner Valero reported this week that its quarterly net income has dropped by 50 percent versus year-ago levels.