There is a lot in stake for OPEC during today’s
meeting in Vienna - Austria, for all participants. Some of the OPEC members
have more to lose than others but at the end everybody needs to keep oil prices
higher, the main reason is that their government’s budgets are highly relying
on oil income. The equation is very simple: same or little higher production –
much lower prices – much less income. But there are some other factors due to
particular members may want higher oil prices than others.
Crude exports
At the end of last year OPEC countries and
Russia agreed to cut their oil production by 1.8 mil bpd. However the effect of
the production cut started to fade after few months as US Shale oil producers
managed to lock in prices higher than their costs and since then they are
opening one oil field after another bringing the US oil production again back
close to 10mil bpd. The other reason the effect of the cut was limited was,
that while the OPEC countries more or less complied with the production cut
agreement there was no decision that they will also decrease exporting. Hence
these countries continued to sell the approximately same amount of oil by
emptying their stocks which obviously meant there was no real change in supply.
However with OPEC oil stocks lower and summer demand picking up, the extension
may have a more balancing effect this time. Therefore the many will search in
the agreement today for the word “export”…
US shale oil
The rising US oil production is definitely
against bringing the balance back to the market. While before the slump in oil
prices the break even for many of the shale oil companies was around $80 per
barrel, the companies managed to increase efficiency and the costs were brought
down below $55 on average almost in any shale oil basin. The steadily growing
number of active oil rigs is confirming the fact that shale oil producers
managed to hedge their future production well above their costs and this will
mean that for OPEC the balance on the oil market will be harder to achieve.
The US shale oil industry is far from what
it’s in the OPEC countries or Russia where the state owned oil companies dominate.
In the US the industry is based on free competition with a lot of independent
companies. A lot of them bankrupted in the last 2 years but the production
capacities was bought by the rest of the industry so there was a much smaller
decline than initially anticipated by OPEC.
Aramco IPO
Saudi Arabia’s planning to sell around 5%
of shares of the countries giant oil and gas producers Aramco. This is one of
the main reasons Saudi Arabia is pushing for higher oil prices as the valuation
of the company mainly depends on the dollar value of the Saudi oil reserves. As
the country is changing the taxation regime of Aramco while the production
decision will stay purely in government hands to make it look better, this also
shows how needed a good valuation of the company.
These are just few factors affecting the
decision today but definitely the market is expecting a move from OPEC. The
positive thing is that lately Iraq also agreed to join the extension of the cut
after the Saudi oil minister visited his counterparty. However the big question
everybody is asking now is if the extension will be enough to keep the traders
bullish. Many are speculating that OPEC may also increase the amount of the production
cut. This was for now not mentioned by the participants. The second question
after regarding the deal will be the member’s compliance with the agreement in
the coming months that was the key question in 1H of 2017.
Summary what to watch
1. If extending the production cut by how much (6-9 months expected)
2. If anything about exports in the wording of the agreement
3. If any increase of production
4. If Russia will join the extension (crucial)
OPEC/Non-OPEC meeting
0800 GMT - OPEC meeting
1300 GMT - OPEC/Non-OPEC meeting
1500 GMT - Joint press conference
Good Luck and remember to watch your risk
and be consistent
Mr Tech Man
DISCLAIMER: This material was created for
informational purposes only and represents the Land of Trading team’s view of
the past and current economic and capital market environment. It is not an
investment advice and should not be viewed that way at all, and the creators of
this material cannot be held liable for any potential losses resulting from
trading, where despite this disclaimer someone would consider this material as
an investment advice. All rights reserved ©2016.
Contact: landoftradingATgmailDOTcom, Blog:
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