Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

An OPEC Oil Deal Extension Isn’t As Simple As It Sounds

Commodities / Crude Oil Mar 22, 2017 - 11:05 AM GMT

By: OilPrice_Com

Commodities

It’s been six months now that oil prices have been reacting to OPEC, first to the possibility of an agreement, and then to the production cut deal itself, forged by OPEC to rebalance the market. The deal--initially aired as ‘an agreement to agree on a deal’ in September and signed at the end of November—will likely impact the market for at least the next six months.


The agreement clearly states that it is production that OPEC producers are vowing to cut, but Iraqi oil minister Jabbar al-Luaibi has recently claimed—rather emphatically—that it is exports, not production, that serve as the baseline for the cuts. And according to Iraq, the agreed-upon cuts have been all about exports all along.

Of course, exports are the logical ‘by-product’ of production of oil exporting nations, but each of those producers feels the weight of production cuts differently. Each OPEC nation has a specific domestic demand for oil based on population numbers and the share of oil and petroleum products in the energy mix and electricity generation. Each member has unique buyers of their crude, along with differing agendas in keeping and/or growing market shares in various corners of the world.

To cut exports rather than production would hit hard the bottom lines of those who are heavy exporters, so it’s quite clear why an oil cartel whose self-proclaimed mission is to secure “a steady income to producers” chose to cut “production” instead of “exports” in its latest supply-cut agreement.

OPEC producers—especially Saudi Arabia, which shoulders the biggest share of cuts—are desperately trying to maintain their most important market shares such as those in Asia, while measuring exports bound for other destinations in its attempt to comply with the production cuts.

The cartel would have never used the language ‘exports’ in a deal to cut supply, because cutting their exports would mean they would hold a smaller market share. Having a smaller footprint globally would, in turn, mean that OPEC would wield less influence over the price of oil. It’s doubtful OPEC would ever agree to such an unappealing scenario.

But Iraq is uniquely positioned. First, Iraq must contend with the Kurds, as well as international companies, with which it has production agreements that come with penalties for breeching. For this reason, Iraq does not have as much control over production as, say, Saudi Arabia, who deals only with state-run oil. So using export figures rather than production figures may show that Iraq is complying at a higher rate, even though exports are not entirely under their control either. The mere perception of compliance, regardless of the validity, is important as far as the market is concerned.

Another reason why Iraq may prefer to cite exports is because exports are a bit trickier to nail down. There is always conflicting loading data and shipping schedules to contend with, and it’s hard to pinpoint precisely how much oil each OPEC nation has heading out the door.

Production, on the other hand, has concise figures (two figures each, we might add) published in OPEC’s Monthly Oil Market Report—one direct reported figure and one secondary source figure. Exports are even less transparent, especially for Iraq, who has export figures for both the north and the south.

Data compiled by Bloomberg showed that Iraq’s February exports of 3.85 million barrels per day were, in fact, 39,000 barrels per day higher than January levels, which doesn’t seem so compliant.

In October 2016, Iraq’s oil exports were estimated to be 3.89 million barrels per day. So even if the “reference basket” that OPEC used to craft the deal was based on exports, it doesn’t look like Iraq’s compliance is particularly noteworthy—it’s just more difficult to pin down exactly how noncompliant Iraq is.

So, for OPEC, it’s about production cuts, but beyond the wording of the agreement, it’s the message – we are the ones finally doing something to bring the huge oversupply back to balance. The fine print, of course, is - we wanted the price of oil higher and stable, so that we could plug the gaps in our oil-revenue-dependent budgets.

The market bought the ‘balance’ message, and oil prices steadied at above $50 for three months. The initial surprisingly high compliance at more than 90 percent, due to Saudi Arabia going the extra mile, instilled further confidence that OPEC was following through its promised cuts. Almost every cartel producer is boasting near full or overcompliance, and those who don’t comply, notably Iraq, are claiming the deal’s baseline is about exports.

The price gains from the OPEC deal have been capped by resurging U.S. shale output at the higher oil prices. But the recent drop in the price of oil wiped out almost all the price increase that the cartel’s deal has managed to achieve.

The message to OPEC was that it may have underestimated U.S. shale resilience once again, and the cartel’s previous plans for higher prices may prove ill-conceived.

OPEC’s playbook currently is 1) urging full compliance from all signatories to the deal, 2) using Saudis to signal they may be fed up with doing the extra heavy lifting for rogue members, and 3) talking prices up from time to time with messages that the supply-cut deal may need to be extended.

Last week, Saudi Energy Minister Khalid Al-Falih told Bloomberg Television that OPEC would extend the deal beyond June if stockpiles were “still above the five-year average.”

According to OPEC’s own estimates from earlier this month, OECD commercial oil stocks in January were 278 million barrels above the five-year average.

OPEC’s deal now is trying to send a unified message that the members are making every effort to rebalance the market, so it’s unlikely that OPEC will correct Iraq’s insistence that the deal was forged over export figures rather than production figures.

The cartel is a diverse group of nations with various bilateral, trilateral and bloc relations among them. OPEC members rarely act in full concert, and seldom keep production-cut pledges. Their game now is playing the market with the possible extension of the cuts beyond June, and they have time until May to try to talk prices up.

If the cartel doesn’t extend the deal, the glut may not clear soon, further depressing oil prices and straining the already stretched OPEC producers’ budgets. If they decide to extend the deal, they risk losing market share and part of their power to sway oil markets and prices.

Link to original article: http://oilprice.com/Energy/Energy-General/An-OPEC-Deal-Extension-Isnt-As-Simple-As-It-Sounds.html

By Tsvetana Paraskova for Oilprice.com

© 2017 Copyright OilPrice.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

OilPrice.com Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules