The market seems to be progressively suspending its doubt and disbelief over the Russia-OPEC alliance, being serious about mopping up oversupply, because the crude rally triggered by the tentative OPEC deal in Algiers Sep 28 got second wind this week in Istanbul, as a diplomatic blitz by producers continued on the sidelines of the World Energy Congress, sending ICE Brent crude to a 15-month-high close of $53.14/barrel on Monday. Though crude slipped from its high perch as the week progressed, Brent and NYMEX light sweet futures were both sitting comfortably above the $50/barrel psychological mark Friday mid-day in Asia.
Our key takeaways and conclusions from the latest turn of events and comments:
ØA production cut agreement when OPEC meets in Vienna November 30 looks increasingly certain, though the quantum of the reduction is still up in the air. Venezuelan oil minister Eulogio del Pino had said ahead of the WEC that OPEC and non-OPEC producers could collectively slash 1.2 million b/d.
ØUntil a reliable figure on the extent of the output cut surfaces, the market will be left to its speculative devices. In that context, Saudi Oil Minister, Khalid al-Falih ’s statement at the WEC, “OPEC needs to make sure we don't crimp too tightly and create a shock to the market,” could mean something on the lower side of the 240,000 b/d-740,000 b/d range that emerged out of the Algiers discussions. A light-touch strategy might be aimed at propping up crude to around $60, a level the Saudi oil minister flagged as a possibility by year-end, but not much higher, lest it spur a revival of production from US shale plays, currently on a downtrend. Sounds good in theory, but such fine balancing of supply by OPEC will have to be seen to be believed.
ØIt seems Iran, Libya and Nigeria may get some leeway to not join an output cut agreement. But there are a few other issues that could still trip up R-OPEC on its way. Russia, for one, has been sending mixed signals on its willingness to participate. Even as Putin told the WEC Monday that he was ready to join OPEC initiatives to impose production limits, Igor Sechin, the head of state-owned Rosneft, retorted, “Why should we do it?” when asked by Reuters the same day if his company would cap output. The obvious rift means Russia might sign on under diplomatic pressure, but not comply. Russian output climbed to a new high of 11.11 million b/d in September.
ØVenezuela has joined Iraq in disagreeing with a baseline for its crude production using the “secondary sources” that produce independent monthly survey data and are cited by OPEC in its official reports. Other members could come out to dispute their baseline as lower than actual output, in a bid to undertake as little a cut as possible under any agreement November 30.
ØOPEC pegged the average 2016 demand for its crude at 31.8 million b/d in its October monthly oil market report, which, compared with its average output over January-September as per the secondary sources, means it overshot by 1.34 million b/d. The organization’s September output, based on an average of figures reported by secondary sources as cited in the OPEC report, climbed to a new high of 33.39 million b/d. The data, coupled with the International Energy Agency warning in its monthly report this week that global crude stocks, which drew in Q3, could start building again in Q4 as demand from the refining sector is expected to fall by 1.5 million b/d on a quarterly basis, capped crude’s rally. The IEA also pointed out that while crude stocks had declined in Q3, refined product stocks continued to increase.
ØWe are not surprised by OPEC’s continued boost in September, given that there was no output restraint agreement in place for the month (and still isn’t). So citing that as a reason for crude sell-off seems a bit strange.
ØThe IEA report, which also talked about a continued build of the already high refined product inventories globally, offers data with a lag of more than a month, so we expect the market continuing to diverge between the bulls who are looking at the R-OPEC deal as glass half full and picking up on perhaps more recent inputs by other reliable agencies suggesting stronger stock draws, and the bears, who might be going with the IEA and remain deeply skeptical of R-OPEC being able to accelerate market rebalancing. That should make for plenty of price volatility in the coming weeks, though OPEC has probably managed to at least put a floor under crude for now.
Deepening rifts and new alliances over Syria spell trouble
Keep an eye on escalating tensions and shifting political strategies over the Syrian war, because hydrocarbons and politics are inextricably linked and the world is looking to political enemies to shake hands over a complex and painful oil production curb agreement.
Syria is not a factor in the big global oil supply/demand picture yet, but it’s worth noting that Egypt had to issue emergency import tenders last Friday, after Saudi Aramco reportedly decided to suspend October deliveries of refined oil products to the country.
This is believed to be in retaliation for Egypt voting in support of a Russian resolution on Syria at the UN Security Council, though the link has been officially denied by both sides. Russia vetoed a Franco-Spanish UN resolution October 8 calling for an immediate halt to Syrian government air attacks on the making no mention ceasing strikes against Aleppo. Moscow’s resolution failed to get the required votes, but was supported by Egypt, Venezuela and China. As a side note, the Russia-Venezuela axis has been prominent through this year in OPEC/non-OPEC discussions to rein in oil production. Venezuelan President Nicolas Maduro on October 7 bestowed on Russian President Vladimir Putin the Hugo Chavez Prize for Peace and Sovereignty of the Peoples (which comes with a statuette of Hugo Chavez but no cash).
Saudi Arabia supports the removal of Syrian President Bashar al-Assad and opposes Russia’s military intervention to back Damascus, while Egypt, like Russia, is in favor of preserving the Syrian regime. As part of a broader Saudi aid and investment package signed during King Salman’s visit to Egypt in April this year, Aramco has agreed to provide Egyptian General Petroleum Corporation 700,000 mt of refined products monthly on a 15-year credit line with 2% interest. In return, Egypt was expected to offer more vocal support for Saudi Arabia on Yemen and Iran, according to political analysts.
In a strategic shift, Turkey appears to be tilting towards Russia after five years of trying to topple Assad. Remember, Turkish forces shot down a Russian war plane over the Turkish-Syrian border last November? Well, tensions over that were truly buried this week, with the signing of the TurkStream agreement between Russian President Vladimir Putin and his Turkish counterpart Recep Tayyip Erdogan in Istanbul on Monday. The agreement calls for the construction of two gas pipelines with a combined capacity of 30 billion cu m/year in the Turkish waters of the Black Sea, one supplying Turkey and the other the rest of Europe. Whether the pipeline will ever get built is anybody’s guess.