TOPICS COVERED :
OPEC+ DEAL SUMMARY
HOW MANY REAL BARRELS WILL COME IN
CURRENT PRODUCTION IN JUNE 2018
IMPORTANT BRENT CRUDE LEVELS
On June 22 2018, Was the day of ministerial meeting of 174th OPEC Meeting . It was been watched by investors , countries and other interested of what would be the outcome. Prior to the meeting there were number roaming around ranging from 600k b/d to 1 mn b/d.
Late evening India time the deal was announced and It was communicated that OPEC which is 152% compliant in May 2018 would come to 100% complaint by the summer end. The communiqué when received by the press did not have a specific number.
Highlights of OPEC communique :
1. Nov 2016 , 171st OPEC Conference decided to have adjustment of 1.2mn b/d.
2. May 2018 , reported an over compliance of 152%.
3. JMMC will deciding that how much will be produced by nations according to spare capacity.
4. Next meeting is Dec 3 , 2018 , to monitor and review the progress.
SO 100% COMPLAINCE MEANS HOW MANY REAL BARRELS ?
As the OPEC Communiqué doesn’t contain a particular number below is the various what various nations had to say with press interactions.
IRAQ : 770,000 b/d would be the real increase.
OMAN : 600,000 b/d – 700,000 b/d real increase over 6 months.
IRAN : Not More than 500,000 b/d
SAUDI : 900,000 b/d to 1,000,000 b/d over 3 months
Lets look at current compliance and spare capacity before analyzing the numbers in the future.
Currently spare capacity is counted around 3.42mn b/d + which was 2mn b/d in 2017 last these levels were seen in 2014 and prices in start of 2014 were $100/bbl and slowly got to $50/bbl . But we believe its too early to judge it same way .
There has been over compliance except few nations. We believe since Saudi has largest spare capacity of 2.02 mn b/d it will be one of the major contributing nation to the new deal. As there is no particular quotas of increase in production this will not be an issue.
Venezuela and Angola has over compliance of 692% and 322% in May 2018 which will be difficult to reverse quickly.
According to us an overcapacity is will be addressed by bringing 650,000 b/d immediately by July 2018.
OVER COMPLIANCE ALREADY BEEN ADDRESSED IN JUNE 2018 ?
As seen , the production ramp up already happening compared to April , 2018 . Saudi & Kuwait are the contributors to increase of the production. Iran & Libya has reduced the production.
Total is already showing that 551,541 b/d have already come into the real market. But there are 10 days more to be counted for the full month number.
IRAN : HOW SANCTIONS TO COME WILL EFFECT OPEC TOTAL ?
Historically the sanctions have resulted in drastic fall of oil production as seen below in the chart
The production fell from 3.8mn b/d approx. to 2.6mn b/d approx. within 15 months of sanctions been imposed. Current production of Iran is at same levels of pre sanctions. Meaning that in previous adjustment of 1.2 mn b/d by OPEC from November 2016 it was a positive contributor.
USA has withdrawn from nuclear agreement with Iran and has placed sanctions which will come in effect by November 2018. USA on Friday has already communicated to Japan to stop buying oil from Iran.
We believe this will result in more faster reduction in oil production than previous as the imposition will be harsher.
DEAL DONE , DOSE IT MEAN PRICE GOING DOWN?
We believe there are three crucial parts to determining the price of Crude Oil from hereon.
1. Increase in Output : As in first 20 days of June 2018 , Saudi & Kuwait will be the main drivers of the increase in total OPEC output as Saudi has more than 2 mn b/d capacity spare.
2. Decrease in Output : Iran ,Venezuela & Libya will be the main driver of reduction in the total OPEC output . Libya is one of as the certain ports were captured by rebels which is now taken back from them so the production should come back. Iran decrease in production we have discussed in detail. Venezuela is a structural issue as the funding to keep the production running is not available. Even the oil they are exporting currently is increasing their dues to global companies.
3. Geopolitical Issues : There are geopolitical issues involving Saudi & Yemen even recently Riyadh intercepted missiles last night. These are war risks which keep a premium to oil prices.
Other Issue the countries facing is trade issues which is a political issue and keeps a risk premium to oil prices.
We believe by September 2018 the production of OPEC+ should add 650,000 – 800,000 b/d as Saudi is interested in reducing its spare capacity and negating the reduction from Iran post November 2018.
But the market and investors are ignoring one more data point which is USA Crude Drawing Inventories which came at -5 mn barrels as compared to estimates of – 2 mn barrels.
Thus , we conclude that Oil price should have an range bound average but there is an upside risk due to Iran sanctions and higher draws even coming during summer months TAKING PRICE TO $85-90/BBL.
INTERNAL INDICATOR PRICE LEVELS:
BRENT OIL -
INDICATOR DURATION PRICE $/BBL
5 MIN 74.33
30 MINS 74.43
1 DAY 75.3
1 WEEK 63.3