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Evan Kelly

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Oil Edges Higher As OPEC Pushes NOPEC For Output Cut


Oil prices inched higher on Friday afternoon, holding above $50 ahead of the Non-OPEC producer meeting this Saturday.


(Click to enlarge)

Friday, December 9, 2016

Oil prices seesawed this week on the hopes and fears of whether or not OPEC will be able to fully implement its historic deal, as well as the uncertainty over the additional non-OPEC cuts. Still, WTI and Brent mostly held onto their gains that accrued from the deal, with both benchmarks seemingly holding safely above $50 per barrel.

Inventories may not fall as much as expected. The OPEC deal has been billed as a cure for the oversupplied oil markets, potentially setting the market up for a shortfall as soon as early 2017, which would require a drawdown in inventories. But some analysts see stockpiles remaining elevated through next year. The EIA’s latest Short-Term Energy Outlook expects inventory builds over the course of 2017, and a few more voices are coming to the same conclusion. “Even with 100 percent compliance from both OPEC and non-OPEC producers global stocks are unlikely to fall in the first half of 2017," Tamas Varga, analyst at brokerage PVM Oil Associates Ltd., told Bloomberg in an interview. “That should keep oil prices in check.” Calculations and estimates from Bloomberg News also finds very few inventory reductions next year. A lot of the uncertainty comes down to whether or not OPEC members comply with promised production cuts, as well as the commitment of Russia and other non-OPEC countries. Full compliance with the OPEC deal could lead to inventory drawdowns, whereas cheating from members could result in inventories remaining elevated.

OPEC meets non-OPEC. A follow up meeting with non-OPEC countries is scheduled for Saturday, where they will hash out the details of the promised 600,000 barrels per day of production cuts. Russia alone promised to cut 300,000 barrels per day, although it appears only willing to reduce gradually over the first half of 2017. OPEC invited 14 non-OPEC countries to the meeting in Vienna, but only five so far have said they will attend – Russia, Azerbaijan, Kazakhstan, Oman and Mexico. One OPEC source told Reuters that the stated cuts of 600,000 barrels per day might actually turn out to be just 500,000 barrels per day, an ominous sign that the results could be less impressive than previously thought. So far, aside from Russia, only Oman has expressed a willingness to cut. Related: The OPEC Effect? U.S. Rig Count Spikes Most In 31 Months

Saudi Arabia in retreat. The Economist lays out a case that Riyadh is losing on all fronts, burning through economic, military, and diplomatic resources. Its side is losing in Syria, it is losing leverage in Iraq, its disastrous war in Yemen is hemorrhaging cash and prestige, and its economy is not doing well. The OPEC deal was a coup for the group as a whole, but Saudi Arabia is shouldering most of the burden of production cuts. Overall, these are uncertain and worrying times for Saudi Arabia.

Oklahoma AG is Trump’s choice for EPA. Oklahoma Attorney General Scott Pruitt was selected by Donald Trump to lead the EPA. Pruitt is known as an ally of the oil and gas industry, a climate change skeptic, and an expert in the workings of environmental law and regulation. He has spearheaded a fight against EPA regulations, suing the agency over greenhouse gas rules. The New York Times wrote in a Dec. 2014 article that Pruitt submitted a letter to the EPA, disputing the agency’s calculation about methane emissions from natural gas wells. The letter was secretly written by lawyers for Devon Energy (NYSE: DVN), demonstrating Pruitt’s close ties to the industry. Needless to say, the industry is welcoming Trump’s selection.

Oil tanker rates plummeting. The oil tanker industry is about to get hammered by the OPEC deal. Higher prices could cut into global demand, which would likely reduce the volume of tankers plying the world’s oceans. Tanker rates could fall by as much as 40 percent – very bad news for tanker companies. Morgan Stanley predicts tanker rates will fall from $45,200 per day currently down to just $25,000 per day next year. However, Reuters reports that the tanker industry is working on new routes to make up for slower business. BP (NSYE: BP) shipped U.S. crude to Asia, a new route that is a very long distance by today’s standards. Related: Oil Rises As Saudis Move To Implement Output Cuts


China oil imports to slow. China’s oil import growth will slow by 60 percent next year, according to a Bloomberg survey. Oil imports could grow by 5 to 9 percent in 2017, as opposed to the annual increase of 11 to 14 percent expected this year. The slowdown has a lot to do with China’s transitioning economy, relying less on heavy industry, but it also has to do with a slowdown in stockpiling for its strategic petroleum reserve. Having filled up a lot of storage tanks, China could purchase less oil next year as a result.

Oil sands companies reviving output. The approval of two major oil pipelines in Canada is giving Alberta oil sands producers a new lease on life. Cenovus Energy and Canadian Natural Resources have announced plans to expand existing projects, adding 50,000 bpd and 40,000 bpd, respectively. The decisions are the first expansions since the downturn in oil prices two years ago, and indicate that Alberta is ready to pour money into projects. Alberta has suffered from a shortage of pipeline capacity that often requires them to sell their oil at a discount to WTI, which often runs as much as $15 per barrel. New pipelines – the Trans Mountain Expansion and Line 3 – will collectively add roughly 1 million barrels per day of takeaway capacity, which should cut down on the discount for heavy Canadian oil. OPEC also sweetened the pot, agreeing to cut production and lift prices, which is crucial for expensive oil sands production.

Canadian carbon tax. Canadian Prime Minister Justin Trudeau has tried to balance the growth of the oil industry with environmental progress, and while he approved pipelines he is also implementing a national carbon tax. The federal government and the nation’s provinces are set to agree to a national carbon tax today. The tax will begin at C$10 (USD$7.60) per ton in 2018, rising by C$10 per year until it reaches C$50 in 2022. The provinces have a choice of the tax or opting for a cap-and-trade program.

By Evan Kelly of Oilprice.com

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