15 February 2016
OIL: OPEC or the «Invisible hand of the market»?
Thus, according to the estimation by the International Energy Agency, oil surplus might form 1.75 mb/d at the market for 1H 2016, which actually is 1.5 mb/d above the previous estimation. At the meantime, the demand growth targets remain unchanged as IEA confirms the prior forecast on demand growth for 2016 FY by 1.2 mb/d. As the sanctions are lifted in January, additional oil from Iran will start entering the market – by early February, Iran has signed new contracts for additional deliveries of about 300 tb/d, which might be launched in no time. Along with that, the rates of new contracts being signed are in line with the forecasts of the annual average adding of the extraction volumes in Iran by 600-700 tb/d. Therefore, we assume the factor of Iran has been reflected in the oil prices already.
Expectations of a significant decrease of the extraction volumes in the US have not been justified yet, however, the extraction volumes’ drop has resumed recently. Sum reduction for past three weeks has formed 49 tb/d. at the meantime, the daily average extraction forming 9.186 mb/d still is above the September lows at 9.096 mb/d. we assume that reduction below the given level will be the only serious driver for the oil quotes adding. From September lows to mid January of 2016, we indicated growth related to increased extraction in the Mexican Gulf, while extraction of the slate oil has gradually been looking down from May of 2015. According to the numbers from Baker Hughes, extraction at the seven largest slate deposits has reduced by the end of January down to 4.95 mb/d vs 5.64 mb/d for May and the given drop has progresses during the eight months from June 2015 through January 2016. Considering the fact, that the significant share of the extractable slate oil generates a negative operation cash flow if the oil prices are below the level of 40 USD, we might be expecting progress of the given trend. At that, the news that one of the top largest players within the sector – Chesapeake Energy – has hired legal advisers on restructuring and bankruptcy, clearly illustrates the scale of problems of the slate oil companies. Despite the fact that given actually is not the first company in the segment to go bankrupt, it will definitely be the largest one: the debt of the company forms 11.6 bn USD vs the sum volume of debt of 42 companies that had already gone bankrupt having formed 17.2 bn USD.
The prospects of emergency session of OPEC still is the most important item in the agenda oil wise. As announced, after a number of talks by the Oil Minister of OPEC with the representatives of the oil states, six states-members of OPEC, and two independent producers (Russia and Oman) were ready to take part in an unscheduled session of OPEC if given meeting has been called for. Note that, coordination with the states extraction oil outside the cartel was one of the terms that Saudi Arabia named as a reason to consider the possibilities of calling for a special session. Talks between the Oil Ministers of Venezuela and Saudi Arabia on February 7 made no breakthroughs; however given has been take positively by Saudis. Intense talks carried out by Venezuela with the other members of OPEC continue and there still is a high probability that the emergency session is conducted in February-early March. News of calling for an emergency session might become an unexpected driver of the oil quotes, however, hopes that the OPEC members and the states outside the organization actually do reach an agreement on cutting the extraction volumes remains blurry, as there is a number of contradictions between the oil-extracting states. However, the recent comments by the Oil Minister of UAE regarding the OPEC members’ being ready to freeze the oil extraction volumes sounded very inspiring in the context of the ability of OPEC to negotiate.
Before the end of February, the oil quotes might be supported by the factors external for the oil market. Dollar’ dynamics vs the major global currencies would be the major one of them. Deceleration of the US economic growth and low inflation rates, which actually are seriously behind the Fed’s targets, force the investors to re-evaluate the prospects of the key rate upping. Given supports weakening of dollar. We assume that the round of dollar strengthening, justified by the exit from QE and expectations of a relatively fast toughening of the monetary policy, is ending, providing for the turnaround point for the commodity markets.
Alarms regarding the state of the Chinese economy and the global economy along with the run from risk that has begun at the given background turning into the global exchange indices dipping and funding currencies’ (euro and yen) and gold growing up were also involved in the oil quotes’ drop in January of 2016. Note, that temporary volatility of the oil has reached extremely high levels, being far greater than the volatility estimates of the exchange grounds (see the Chart), indicating the oil being oversold.
Spread between the Brent and WTI types of the oil has recovered in a blink of an eye in early February. We do not consider the spread upping to be an indication of Brent oil getting expensive. Given situation can mainly be explained by the news on the plans on the production volumes cut by the oil processing companies in the US (given cut has already been announced by Monroe Energy and Valero Energy); and also with respect to the oil tank farm in Cushing getting fully filled. The oil storage in Cushing has reached an all-time high of 64.77 mn barrels, 8 bbl yet to come to full volume). We assume that given situation would be favorable to the acceleration of the extraction volumes’ cut in the US, possibly becoming a driver of the Brent oil quotes’ growth. At that, the spread between the oil sorts might grow even bigger. At that, we might observe anticipatory growth in the far contracts (currently it is near zero there). Remarkably, the share of the current long positions of the speculators in the futures for Brent has grown for the recent weeks and according to historic examples, the significant overweight of the long positions of speculators in Brent vs WTI normally forms a positive signal of to the oil quotes.
According to our model of the oil prices that involves the current level of storage, demand and dollar rate vs the global currencies (based on Trade Weighted Broad Dollar Index), the investors attitude towards the emerging markets’ prospects (considering the MSCI Emerging Market / S&P 500 indices’ ratio), and considering the correction by the dollar inflation; the fair value of the oil price currently forms 38.8 USD per barrel of Brent. We assume that in terms of expectations of the emergency session of OPEC, the selloff potential in the oil futures will be limited. The way too low ratio of the long and short-term positions of the speculators in the futures for WTI (where the majority of speculative positions is focused) indicates given perfectly. We assume that the oil quotes are most likely to stay at 30-36 USD per barrel of Brent within February sessions. OPEC session being announced might drive the oil quotes above the level of 40 USD per barrel.
Author: Vasiliy Tanurkov