So what will this new ‘agreement’ entail – a freeze, a production cut, or in reality Saudi Arabia cutting its production to allow other OPEC members, such as Iran, Nigeria, Venezuela and Libya to continue producing at current or higher rates?
In fact the most closely watched statistics from now to November 30 will be the weekly US oil inventory and production data issued by the Energy Information Administration (EIA), and the weekly oil rig useage reports from Baker Hughes, the world’s Number 3 oil services group.
They will drive sentiment as much as anything – especially if the EIA data show continuing falls in US production (8.460 million barrels a week ago) and the size of the US oil stock holdings – still at near record levels.
They totalled 502.7 million barrels last week, down 1.9 million barrels and the 4th weekly fall. That’s the lowest level of stocks since the week of February 5 this year.
Baker Hughes (which updates its weekly figures tonight, our time) said there were 418 rigs looking for oil last week – up 102 from the low of 316 in late May and early June.
Including gas rigs, there were a total of 511 rotary rigs in use in the US last week. That’s 327 rigs or 39% lower than the same time last year.
Oil rig use is down 222 from a a year ago and accounted for nearly 82% of all rigs in use (telling us the shale gas boom has peaked well and truly).
These are the figures will drive oil market sentiment, as well as the prices of oil and gas companies large and small.
But these figures underline the single largest danger to the agreement – OPEC accounts for 34% of oil production, Russia about 12% – so if their nerve holds, then any agreement should remain steady.
But the US and its 8.4 million barrels a day will be the one to watch. Any sustained rise in prices will see an upturn in production, and should that start, then there has been so much drilling capacity added in the past three months, that the rise will be sustained for months.
Most likely any OPEC deal will be a lot of smoke and mirrors, held together by the hope that so many countries and companies want to see higher prices (especially Saui with its near $US100 billion budget deficit).
The amount of oil taken off the market (permanently) will determine how successful any agreement is in cutting the supply glut.
Oil analysts believe between 700,000 and 1million barrels a day (b/d) will have to be taken off the market to have a meaningful impact on global supplies and prices.
Certainly yesterday’s rises in oil prices and share prices of major energy groups was more in hope than in any cold hard analysis.
The new production target of 32.5 million barrels a day is a fall of between 240,000 b/d and 740,000 b/d from the 33.24m b/d OPEC pumped in August, according to analysts’ estimates compiled by Opec.
Emmanuel Ibe Kachikwu, Nigeria’s minister of state for petroleum resources, said OPEC would set up a committee to work out how the reduction in production will be split among members. It will report back to the group on November 30, which is when OPEC plans to hold its next formal ministerial meeting in Vienna.
“This downshift is likely to help” rebalance the global oil market, said Robert Haworth, senior investment strategist with U.S. Bank Wealth Management told Marketwatch. But he added that the market will still have to “work through the excess of US and OECD oil inventories.” “For now our view remains that upside here is limited, with prices above $50 per barrel likely rekindling U.S. oil production and limiting further prices gains,” he said.
“A 2% cut in cartel production is a lawn chair off the Titanic with regards to global supply. Unless OPEC follows up with announcements for the methodology of the cut, the specific magnitude of it, and the intent to enact a program that appreciably affects global supply going forward, expect to see the spot price of oil settle back into the range it’s inhabited since the second quarter of this year,” Scott Cockerham, managing director at Huron, also told Marketwatch.
Besides, with OPEC production near record high, oil traders and analysts alike aren’t quite sure if an output agreement will make much difference.
