OPEC, Non-OPEC Oil Producers Recommend Extending Production Cuts By Six Months

Tyler Durden's picture

Having failed to "rebalance" the oil market in the first six months following the implementation of the Vienna production cut agreement, with crude inventories in the US hitting all time highs in the interim...

... OPEC and non-OPEC oil producers found themselves in the unpleasant position of scrambling for solutions at this weekend's Kuwait meeting - in which Saudi Arabia was conspicuously missing - where just two things were discussed: deal compliance, which OPEC paradoxically claims is more than satisfactory despite the relentless climb in inventories, and whether to extend the production cuts by another six month.

And as the Kuwait meeting in which OPEC and rival N-OPEC producing countries met to review progress with their pact to cut supplies drew to a close, a joint committee of ministers from OPEC and non-OPEC oil producers recommended extending by six months the global deal to reduce oil output by 1.8 million barrels, a draft press release from their meeting on Sunday showed.

The oil ministerial committee "expressed its satisfaction with the progress made toward full conformity with the voluntary production adjustments and encouraged all participating countries to press on toward 100 percent conformity," said the draft, seen by Reuters.

The December accord, aimed at supporting the oil market, has lifted crude LCOc1 to more than $50 a barrel. But the price gain has encouraged U.S. shale oil producers, which are not part of the pact, to boost output.

In its statement, the committee said that “certain factors, such as low seasonal demand, refinery maintenance, and rising non-OPEC supply, have led to a further increase in crude oil stocks. At the same time, the liquidation of positions by financial players in the market was also observed.”  In other words, the committee blamed everything, including "evil selling speculators" except non-compliance with the deal, of course as that would crush what little credibility OPEC had.

Oil inventories are high because of low U.S. demand and higher supply, and the market should re-balance in the second half of the year, OPEC Secretary-General Mohammad Barkindo told reporters in Kuwait. Inventories in countries in the Organisation for Economic Co-operation and Development are currently 282 million barrels higher than their five-year average, he said at the meeting on Sunday.

It also left on a positive note: "However, the end of the refinery maintenance season and noticeable slowdown in U.S. stock build as well as the reduction in floating storage will support the positive efforts undertaken to achieve stability in the market," it said.

"Oddly", there was no mention of US shale production, which has soared in recent months, happy to grab market share from OPEC which has allegedly cut production by nearly 2 million barrels daily, and whose output continues to ramp higher in line with the resurgence in US oil rigs.

Before the meeting, Iraqi Oil Minister Jabar Ali al-Luaibi told reporters there were some encouraging elements that suggested the oil market was improving, and that if all OPEC members agreed measures to help price stability, Iraq would support such steps. "Any decisions taken unanimously by members of OPEC ... Iraq will be part of the decision and will not be deviating from this," Luaibi said quoted by Reuters

Iraq's oil production is running at 4.312 million bpd this month, Luaibi said, adding that his country had cut its oil exports by 187,000 bpd so far and would reach 210,000 bpd in a few days. Compliance with the supply-cut deal was 94 percent in February among OPEC and non-OPEC oil producers combined, Russian Energy Minister Alexander Novak said.

Russia is committed to cuts of 300,000 bpd by the end of April, Novak said, adding that a deal extension could be discussed on Sunday. "For today, obviously, this is within the sphere of our questions," Novak said and added that he expects global oil stockpiles to decrease in the second quarter of this year. "The dynamics are positive here, I believe," Novak said, adding that inventories in the United States and other industrialized countries had risen by less than in the past.

OPEC’s compliance rate was 106% in February, and non-OPEC nations, including Russia, have reached compliance of 64 percent, Kuwait’s Almarzooq said Sunday. The combined compliance rate of both was 94 percent, he said.

Kuwaiti Oil Minister Essam al-Marzouq said the oil market may return to balance by the third quarter of this year if producers comply fully with their production targets.

"More has to be done. We need to see conformity across the board. We assured ourselves and the world that we would reach our adjustment to 100 percent conformity," Marzouq said.

The biggest question, however, how OPEC plans to deal with the rising shale threat, which as Goldman noted last week has become the global oil price setter, was unanswered.

This is how Goldman explained the dramatic change in the global oil cost curve over the past three years:

Shale’s short time to market and ongoing productivity improvements have provided an efficient answer to the industry’s decade-long search for incremental hydrocarbon resources in technically challenging, high cost areas and has kicked off a competition amongst oil producing countries to offer attractive enough contracts and tax terms to attract incremental capital. This is instigating a structural deflationary change in the oil cost curve, as shown in Exhibit 2. This shift has driven low cost OPEC producers to respond by focusing on market share, ramping up production where possible, using their own domestic resources or incentivizing higher activity from the international oil companies through more attractive contract structures and tax regimes. In the rest of the world, projects and countries have to compete for capital, trying to drive costs down to become competitive through deflation, FX and potentially lower tax rates.

The implications of this curve shift are major, all of which are very adverse to the Saudis, who have been relegated from the post of long-term price setter to inventory manager, and thus the loss of leverage. Here are some further thoughts from Goldman:

  • OPEC role: from price setter to inventory manager In the New Oil Order, we believe OPEC’s role has structurally changed from long-term price setter to inventory manager. In the past, large-scale developments required seven years+ from FID to peak production, giving OPEC long-term control over oil prices. US shale oil currently offers large-scale development opportunities with 6-9 months to peak production. This short-cycle opportunity has structurally changed the cost dynamics, eliminating the need for high cost frontier developments and instigating a competition for capital amongst oil producing countries that is lowering and flattening the cost curve through improved contract terms and taxes.
  • OPEC’s November decision had unintended consequences: OPEC’s decision to cut production was rational and fit into the inventory management role. Inventory builds led to an extreme contango in the Brent forward curve, with 2-year fwd Brent trading at a US$5.5/bl (11%) premium to spot. As OPEC countries sell spot, but US E&Ps sell 30%+ of their production forward, this was giving the E&Ps a competitive advantage. Within one month of the OPEC announcement, the contango declined to US$1.1/bl (2%), achieving the cartel’s purpose. However, the unintended consequence was to underwrite shale activity through the credit market.
  • Stability and credit fuel overconfidence and strong activity: A period of stability (1% Brent Coefficient of Variation ytd vs. 6% 3-year average) has allowed E&Ps to hedge (35% of 2017 oil production vs. 21% in November) and access the credit market, with high yield reopen after a 10- month closure (largest issuance in 4Q16 since 3Q14). Successful cost repositioning and abundant funding are boosting a short-cycle revival, with c.85% of oil companies under our coverage increasing capex in 2017.

Finally, with Saudi Arabia absent, the Kuwait meeting was largely moot. Khalid Al-Falih, the Saudi energy minister said in a Bloomberg Television interview on March 17 that the deal will be maintained if oil stockpiles are still above their five-year average.

In summary: It’s too early to decide on an extension of the output cuts, and OPEC will take up the issue in May, Barkindo said at Sunday’s meeting, during which ministers will monitor compliance with the targeted reductions.

* * *

For those curious, here is the full blast of Bloomberg overnight headlines covering the Kuwait meeting

KUWAIT OIL MINISTER OPEC COMPLIANCE IN FEB BETTER THAN JAN
KUWAIT: WE ARE ASKING COUNTRIES TO INCREASE COMPLIANCE
KUWAIT: WE SHOULD SEE MARKET REBALANCE END OF YEAR
KUWAIT: WE SHOULD SEE OIL STOCKS DRAWDOWN IN 3Q
KUWAIT OIL MINISTER: INDUSTRY NEEDS TO ADDRESS CHALLENGES
KUWAIT: SAUDI ARABIA, ANGOLA EXCEEDED COMMITMENTS TO CUT OUTPUT
KUWAIT: OIL MARKET WILL BE IN BALANCE IN 3Q IF COMPLIANCE 100%
KUWAIT: OIL COMMITEE REPORTS HIGH LEVEL OF CONFORMITY
KUWAIT: OPEC IS STUDYING EXTENSION OF CUTS DEAL FOR SIX MONTHS
KUWAIT MINISTER: OPEC, NON-OPEC COMPLIANCE WITH CUTS IS AT 94%
KUWAIT: COMMITTEE CALLS FOR OPEC TO MAKE RECOMMENDATION ON CUTS

RUSSIA'S ENERGY MINISTER: MINISTERS DISCUSS EXTENDING CUTS DEAL
RUSSIA’S NOVAK: OPEC/NON OPEC COMPLIANCE 94% AS OF END OF FEB
RUSSIA’S NOVAK: OPEC, NON-OPEC DISCUSS EXTENDING OIL-CUTS DEAL
RUSSIA: OPEC, NON-OPEC COOPERATING AT `VERY HIGH LEVEL’

IRAQ TO SUPPORT EXTENDING OIL CUTS IF OTHERS IN OPEC AGREE
IRAQ PRODUCED 4.312M B/D OF OIL IN MARCH: MINISTER
IRAQ’S MARCH OIL EXPORTS IN AGREED RANGE: MINISTER
IRAQ CUT OIL OUTPUT BY 187M B/D UNDER OPEC DEAL: LUAIBI
IRAQ TO CUT 210K B/D OF OIL OUTPUT IN FEW DAYS: LUAIBI

OPEC CHIEF SEES MARKET REBALANCE IN SECOND HALF OF 2017
OPEC: PRODUCERS REACHED HIGH LEVEL OF COMPLIANCE WITH CUTS
OPEC HOPES FOR HIGHER LEVEL OF COMPLIANCE WITH OUTPUT CUTS
OPEC CHIEF: TOO EARLY TO DECIDE ON EXTENSION OF OIL CUTS DEAL
OPEC CHIEF: OIL MARKET OPTIMISM IMPROVED ON OUTPUT CUTS
OPEC: OIL STOCKS ARE HIGH ON LOW U.S. DEMAND, RISING SUPPLY
OPEC: OIL STOCKS TO DECREASE IN SECOND HALF OF THIS YEAR

OMAN OIL MINISTER SAYS MAKES SENSE TO EXTEND OUTPUT CUTS 6 MOS
OMAN SUPPORTS OIL OUTPUT CUTS UNTIL END OF YEAR: MINISTER

VENEZUELA OIL MIN: WE ARE READY TO BACK EXTENDING OUPTUT CUTS

OPEC, NON-OPEC COMMITTEE SAID TO RECOMMEND OIL-CUTS EXTENSION
BARKINDO: OPEC TO DECIDE ON EXTENSION OF OIL CUTS DEAL IN MAY

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Ban KKiller's picture

Good luck ignoring the cheaters.

Jäger's picture

which is, of course, all of them

johngaltfla's picture

Good luck with that. OPEC is like a blind toothless Chihuahua running around on an interstate highway looking to bite a semi truck's tires. Eventually the dog is going to lose big.

GUS100CORRINA's picture

With America increasing production and new pipeline projects underway, OPEC dominance is coming to an END rapidly.

IT IS ABOUT TIME!!!!!

We need to quit sending money to nations who HATE AMERICA. I would love to see OIL IMPORTS go to "0"!!!

sinbad2's picture

So America will destroy OPEC, by selling oil to the world, at 3 times the price of ME producers?

The only way that will work is if the US stops the other countries producing, like it did with Sudan Iraq Libya etc.

Blowing up Saudi Arabia would be easy, but blowing up Russia, might just get you killed, and the US needs those Saudi dollars, oh what to do what to do.

Last of the Middle Class's picture

It's a full on grab for market share now, a '60's style gas war among producers and the camel jockeys are too stupid to strapped financially, trying to maintain a constant income stream, to even think about conserving resources.

johngaltfla's picture

Keep in mind that current tecnological evolutions are getting some shale producers capable of profitable production at $20-$25 per bbl. This means that we can actually bend the price curve down by exporting more oil cheaper thanks to the new network of pipelines being built.

For once we have chance to extract our military OUT of the Middle East and actually cut off imports from Venezuela and Mexico thus reducing dependency to a point where we can actually invest in American infrastructure and military interests instead of those of nations who continue to shit on us.

Jäger's picture

Oil is only part of the reason we are in the ME.

sinbad2's picture

I hate to be the bearer of bad news, but that is BS.

All the shale producers would be bankrupt, if their assets were valued at current market values.

The US banks still value their oil assets at $147 a barrel.

ZH broke that story, and shortly after ZH got fucked over.

Joe Sichs Pach's picture

It is abundantly clear that fundamentals matter not to the oil "market"

cossack55's picture

Tho, oddly, fundamentalists do matter. Hmmmm..........

Stuck on Zero's picture

Fundamentals don't matter any more.

sinbad2's picture

It's the vibe that's important.

SoDamnMad's picture

Let's extend the cheating on our quotas by 6 months in hope we can fool the market.  That or maybe a war will break out that we aren't involved in but will make people think oil will be in short supply.  The Faroe Islands could have war declared on them by Greenland over the killing of the long finned pilot whales. That should do it.  The Sea Shepard could go ram some ferry and all hell will breka loose. NATO vs NATO. Whatever.

Putrid's picture

I'm calling bullshit on all Oil data ... I found sales by refiners dropped by 16% in ten years and yet the EIA.gov reports an increase in output!!??

Everyone is lying through their teeth about oil and the dollar it backs. Production figures are a joke ... we've hit the wall and the bullshit has hit peak

www.beforethecollapse.com/2017/03/17/charts-of-us-gasoline-sales-the-us-...

Putrid's picture

And I know some guys reading Zhedge think the gold-buggery is bullshit but it ain't really. If you think it's bullshit you have no idea how this World really works. All my buddies have loaded up and I've gone 100% all in. And I had no gold two months ago.

sinbad2's picture

True, I found a very interesting page at the EIA some years back, where they listed the production costs in various countries and regions.

I remember off shore US production cost $60 a barrel, the EIA pulled that page.

Putrid's picture

Get the fuck out of here!!! I wonder if there's a way to get that archived page? Any tech guys out there?

Let me tell you, the feedback I've gotten since last week is that the figures are all baked. Lying, they're all lying...

Kyddyl's picture

Enjoyed the link! Note there are no new refineries being built and the ones in my front yard are modifying to process ever heavier sour and shale. Very unpopular here as it's even filthier. When OPEC jerks the rug, the prices for oil and gas will skyrocket as will inflation for everything. Bought gold at $600. and still have it. 

TheytookERjobs's picture

Chief Yellen is buying all the oil and dumping it into the ocean.

A. Boaty's picture

Wake me when they work thru the petroleum in storage.

MuffDiver69's picture

Smoke and mirrors to keep it in the 45-55 range...Looks like they are waiting on a major conflict once again...

Jdhank's picture

Production cuts?!?  What production cuts?!

jmack's picture

OIl $60 dollars by friday.  Oil $20 in 6-18 months.

Bloomberg2016's picture

North American producers must be loving this. They can continue to ramp production and OPEC will keep a floor on prices by jawboning and cutting their own production. This is like retard game theory.

 

Presumably all this effort is for the impending Aramco IPO but it appears KSA is cutting off their nose despite their face.

adr's picture

If we were really using all this oil, there would be no reason for the USA ti export oil. 

Until Jewish control of the commodity markets is broken, we wilk never know the truth of anything. 

Oil majors were enriched beyond their wildest dreams with the artificial rise of oil from $20 to $147. So much that they began to believe oil belongs above $100 instead of below $30.

Rebalancing and price recovery is not to $100, but to $25.

Oil going to $147 destroyed the functional global economy. The entire cycle of production was disrupted and a wave if massive inflation swept the globe making much of what is produced unaffordable for the masses. Wages and incomes actually went down while everything skyrocketed in price. 

Am I supposed to forget a common fast food meal cost $3.75 in 2008 and now costs $8.00 and is smaller with less ingredients. That gasoline was $1.75 when oil traded at $75 and is now $2.35 with oil under $50. Premium gas used to be $.15 more than regular, but is now $.60. 

Businesses aren't going bankrupt because of Amazon. They are going bankrupt because the majority of the population is being fucked over and the ability to live any lifestyle above mexican Ghetto is increasingly difficult. 

Putrid's picture

What the children don't get is that gold and oil decide the fate of the petrodollar. Both are manipulated to achieve the same goal: World Wide Domination.

Zerohedge children haven't grown up yet; Zerohedge Adults have.

johnnycanuck's picture

Some buddies are making a lot of effort to blow the shale bubble back up again. 

It's interesting that ZH included a Reuters article in it's daily picks recently yet ignores the content when picking and choosing data to include in it's round up prognosis.

Yes there are more rigs drilling wells in the US, but that isn't the whole story by any means and shale producers have focused on their best producing wells to boost output per active well and make their short term financial results look better for credit purposes.

Some highlights;

'All drill, no frack: U.S. shale leaves thousands of wells unfinished'

"U.S. shale producers are drilling at the highest rate in 18 months but have left a record number of wells unfinished in the largest oilfield in the country – a sign that output may not rise as swiftly as drilling activity would indicate."

Why would they do that?

"Reuters interviews with more than a dozen well completion service providers, oil and gas lawyers and industry experts show that some operators are drilling because their leases require them to do so within a specified time limit to keep their leases. But they may not be required to actually pump the oil immediately after they have drilled the hole."

"The value of land in the Permian has rocketed as oil prices recovered to around $50 a barrel, so oil firms are now scrambling to do the required drilling to keep leases they had left dormant.

 

"During the period where we had the downturn in price, there were a lot of leases that were in danger of being lost ... they had to drill a well to maintain it,"

"Fracking is more expensive than drilling and is time consuming. As much as 70 percent of well completion costs are tied to fracking, while 30 percent is for drilling, experts say."

 

Gamblers gonna gamble right?

 

"The number of incomplete wells could complicate OPEC's attempt to balance markets, as they could be completed relatively quickly if the oil price rises.

Saudi Arabia is targeting a $60 per barrel price, and that could trigger those well completions and bring a new wave of supply to the market."

http://www.reuters.com/article/us-usa-shale-insight-idUSKBN16V0IL

silverer's picture

US consumer advocates recommend lowering gas consumption for six months. You know, for the environment.

user2011's picture

So said, they really have no other tricks.     I doubt they will get any pump and dump this  time

 

ThanksIwillHaveAnother's picture

Why is the oil industry exempt from price manipulation laws?  Because the Petro $ is more important???

sinbad2's picture

Because the major price manipulator is the USA, and the USA will destroy anybody who calls it out.

BritBob's picture

Falklands Oil

 

Rockhopper Exploration has issued an update on planning for Phase 1 of the Sea Lion oil field development in the offshore North Falkland basin. Operator Premier's latest estimate of capex to first oil is US$1.5 billion, with life of field costs (capex, opex, and lease) of around US$35/bbl for Phase 1.

 Rockhopper CEO Sam Moody described this as “highly attractive” in the context of the current oil price. The estimated break-even price is US$45/bbl.
The partners have submitted an environmental impact statement and revised draft field development plan to the Falkland Islands government, and discussions are set to continue on a range of operational, fiscal, and regulatory matters.
They have also reached a settlement on an insurance claim relating to costs incurred on the Isobel Deep exploration well during the 2015/16 North Falkland basin exploration campaign. Value is US$90 million (after deductions) on a gross basis. (MercoPress 23.12.16)

What about the Argentinians?

Falklands – Territorial Waters: https://www.academia.edu/10574593/Falklands_Islands_Territorial_Waters

All hot air...

 

negatratoron's picture

How influential is OPEC?  How much fossil fuel is obtained through them vs through Russia and Canada?  Do they generally conspire with OPEC, or are they largely independent?

sinbad2's picture

OPEC countries pump out 72 milllion barrels a day, non OPEC 42 million, so yes they are important, and the US helped to create, and still supports the cartel.

Canada is a smallish player with about 2.5 M bpd of very expensive oil.

Russia pumps out about 10 M bpd, about the same as SA.

Because OPEC is designed to enhance US interests, it's very unlikely that Russia would conspire with OPEC. Russia will pump as hard as it can, to keep oil prices below $50, because at that price the American oil companies are not viable.

Yen Cross's picture

   lol> The[OPEC] Jawbone is all lubed up with camel cum, for the algos next week. 

Salsa Verde's picture

Go right ahead, every time the price to goes up, the Shale producers in the US and Canada become more profitable and pour yet more money into R&D to further streamline their processes.  Its a death spiral written in the very fabric of the market; so awesome watching them tie their own noose and yet have no clue how it got around their neck.

sinbad2's picture

Enough of this socialism, let the market set the price.

The high cost producers have to go, and Governmements(US) need to stop manipulating the market by lending(giving) free money to the old expensive producers.

Kyddyl's picture

Let this clarify what is meant by OPEC and non OPEC nations. : https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIM_NUS-NRS...