Is the World producing enough oil?

15:31 21 September 2018

Summary:

  • Saudi Arabia and Russia increased production significantly since meeting in June

  • Risk of a drop in production in other OPEC countries

  • Will the US experience substantial collapse in demand?

It is unquestionable that the Saudi Arabia as well as Russia raised their oil production noticeably since June’s meeting in response to supply turmoil in other OPEC countries. Decreases in oil production in Venezuela, Libya and Nigeria were big enough to allow other producers rise production without disturbing the uptrend on the oil market. Despite record output in Russia Brent managed to move to the vicinity of multi-year highs. More issues concerning the output in some OPEC countries can be spotted on the horizon what allows certain producers to continue with production increases. What can we expect in the next months?

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Russian oil output surpassed levels from the end of the Soviet era and forecasts point for more upside. Source: Bloomberg

Citi sees significant supply risks in the World. Bank suggests that decrease in production and deliveries (mainly in Iran, other Middle East states as well as Latin America countries) could reach 1.5 million barrels per day (mbd). Some forecasts point that deliveries from Iran could move below 1 mbd what would cause a drop of 1-1.1 mbd from the current levels.

Iranian exports decline sharply even without direct sanctions in place yet. Source: Bloomberg

Will Saudi Arabia and Russia cope with possible oil deficit? Firstly, Saudi Arabia said recently that it is perfectly fine with price of $80 per barrel what may suggest no additional actions in the nearby future. Secondly, production capacity of OPEc countries could be limited. Citi estimates maximum Saudi capacity at 1 mbd. Bloomberg’s estimates are slightly higher but it still could be not enough to satisfy the demand what points to moderate price increases.

Saudi Arabia could boost its output by as much as 0.6mbp while Russia by around 0.1-0.2 mbp. Source: Bloomberg

Iran does not agree with actions that could harm its market share. The country is going to question each “hostile” decision made by associated countries. OPEC technical meeting is scheduled for this weekend and its aim is to recommend whether the agreement shall be adjusted to provide stabilization on the oil market. While no such adjustment is expected it seems that countries like Saudi Arabia and Russia do not take opinions of other countries into consideration anyway.

Meanwhile, investors sees increased risks when it comes to turmoils on the supply side. The amount of long positions increased significantly while the amount of short ones remains low. However, when it comes to the latter the situation may continue just as it was in 2017.Change in the net speculative positioning may suggest that investors expected turmoil on the supply side. Source: Bloomberg

In case countries like Saudi Arabia or Russia do not choose to officially lift production targets we may see further oil prices increases amid risks of reduced output from other OPEC countries. On the other hand, situation on the US oil market looks slightly different in the short term.

We are still encountering strong rise in the oil output and there is nothing that would suggest that the expected production difficulties in the Permian region will actually materialize. However, possible collapse in the oil demand may be looming due to planned maintenance in the US oil refineries.

Oil processing in the US raised sharply as of late due to risks connected with hurricanes. However, the impact of these hurricanes on the US oil industry turned out to be limited.

Oil Price Information Service says that new regulations requiring the maximum content of sulphur to be 0.5% for the ships fuel will take effect in 2020. Significant portion of the US oil refineries is not prepared for the production of such types of fuels. Adjustment is said to last from 6 to 8 weeks and the current season of maintenance works seems to be ideal for such actions. Such scenario will lead to significant drop in the demand for oil, what at the current levels of output should lead to significant build in inventories. However, it is exactly what seasonality suggests right now.

The utilization rate in the US oil refineries was substantially higher this year in comparison to previous 5 years. Source: Bloomberg

A drop in the utilization rate (white line, inverted axis) may lead to build in inventories (green line, inverted axis), what in turn could cause oil prices to decline (yellow line). Source: Bloomberg

In theory, we should expect the Brent-WTI spread to narrow as current width suggest a rebound in the international demand for WTI. However, having in mind the situation in the OPEC countries, Russia and the US spread may actually widen further.

Brent-WTI spread widened significantly and the situation may be set to continue. Source: xStation5

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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