Oil Tumbles After OPEC Ends With A Whimper; Agrees Only To Nine Month Extension

Tyler Durden's picture

The OPEC Vienna meeting has not officially concluded just yet, but moments ago a delegate told the WSJ and Reuters that the oil producing cartel had decided to do what had been widely telegraphed previously, and merely extend output cuts by nine months to March 2018. While the full quota breakdown has not been released yet, the cuts are likely to be shared again by a dozen non-members led by top oil producer Russia, while several nations like Iran and Nigeria will remain exempt from production caps.

OPEC cuts had helped push oil back above $50 a barrel this year, giving a fiscal boost to producers, many of which rely heavily on energy revenues and have had to burn through foreign-currency reserves to plug holes in their budgets, however in recent weeks oil dropped to the mid-$40s again, forcing OPEC to agree to the production extension in hopes of creating backwardation in the oil strip, in order to eliminate shale producers from the question. The rebound in oil prices has in turn spurred growth in shale output, which is not participating in the output deal and whose breakeven prices have tumbled,  slowing the market's rebalancing with global crude stocks still near record highs while US producers steal market share from Saudi Arabia and other OPEC members. 

Meanwhile, as news of the agreement leaked several hours earlier, Oil prices fell off a a "bit of a cliff" as it was unveiled that a further production decline would not follow, resulting in a classic "buy the rumor, sell the fact" move. These were the headlines that hit shortly after Europe opened"

  • EXTENSION OF OIL CUTS WILL BE FOR 9 MONTHS STRAIGHT: AL-FALIH
  • FALIH: DEEPER CUTS HAVE BEEN SUGGESTED BUT NOT THOUGHT NEEDED
  • 9-MONTH EXTENSION AT SAME OUTPUT LEVEL IS `SAFE BET': AL-FALIH
  • OPEC WILL MONITOR MARKET, PRICES AFTER 9 MONTHS: IRAQ OIL MIN

And judging by the market's reaction, with WTI falling to a low of $50.17 after reaching a high of 52.00 in a very aggressive move, with Brent plunging in tandem, it was clear that the market was hoping for more.
 

And then this:

  • BRENT CRUDE EXTENDS DROP, FALLS $1.24 TO DAY-LOW $52.72/BBL

Finally, courtesy of Bloomberg, here are some sellside reactions and suggestions of what to expect next:

JPMorgan head of oil and gas for Asia Pacific region Scott Darling

  • OPEC extending oil cuts by 9 months seen “price positive”
  • “OPEC needs to address around the world excess oil and oil product inventories”
  • Cuts need to remove another 325m bbl of excess oil from storage

CME Group senior economist Erik Norland

  • All OPEC’s options are bad, $35 oil would be no shock
  • Increase in non-OPEC production, particularly in U.S., has cost the group market share; deeper output cuts would worsen that situation
  • Sees OPEC extension of cuts priced in, while U.S. production likely to increase further

Citigroup analysts including Ed Morse

  • Sees RBOB +35c/gal. y/y in 3Q; retail price gain to $2.50
  • Gasoline “should be enmeshed in a tug-of-war between underlying oil prices pulling against slackening demand growth and too much supply”
  • RBOB seen at $1.75/gal. in 3Q vs $1.40 in 3Q16; retail gasoline price estimated rising to $2.50/gal., +13% y/y

Fearnleys report

  • LPG arb looks “very poor” from U.S. and there is hardly any incentive to charter in spot tonnage for it

Energy Aspects report

  • Oil-market tightening to help clear diesel glut
  • Global oil-market tightening to accelerate in 3Q, resulting in narrower refining margins that “will help clean up the diesel market even if stocks build seasonally in the summer months first”
  • Market appears to be pricing in new sources of diesel supply in coming months in addition to extra supply as seasonal work is completed; market doesn’t seem to be anticipating a tightening in crude markets that would suppress refining margins and as such restrict stockpiles of the distillate

WoodMackenzie report

  • Will raise Brent 2018 outlook to $55/bbl if OPEC extends cuts
  • That will be up from $50 forecast in January based on no output cuts and supply growth of 2.4m b/d y/y vs demand gain of 1.2m b/d y/y next year
  • Little impact likely on 2017 forecast of $55/bbl

Energy Aspects report

  • U.S. Gulf-Europe diesel arb “viable,” export demand strong
  • “Strong demand from Brazil and a viable arbitrage to Europe” has supported U.S. diesel crack, and limited increases in U.S. Gulf distillate stocks as refineries in that area run at record rates
  • Export demand “to remain strong in the near term, which will keep margins supported,” though high supplies remain a concern

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Last of the Middle Class's picture

OPEC is gone. They're going to get the big OPEC dick up one more time for the selling of Saudi's oil company, then it's all shit. There will be thousands of PhD dissertations of the rise and fall of OPEC and the international monopoly of a commodity and how it escaped said monopoly. Personally I hope the sand niggers have to eat camel fleas for the next thousand years in order to survive.

AVmaster's picture

umm... no...

 

You must've missed the memo where saudi's bought a record amount of US weaponry and how iran is gonna get blown to hell...

 

That'll fix the priceing "issue"...

 

And muduro will blow his load and a big sigh of relief when the war starts... if he makes it...

VinceFostersGhost's picture

 

 

Has anyone seen the Galveston tanker report today?

Arnold's picture

Hopium supply running low in this market.

I find the analyst mention of dirty diesel interesting, though.
Not seeing the glut at retail level in pricing.

south40_dreams's picture

"Personally I hope the sand niggers have to eat camel fleas for the next thousand years in order to survive."

Quote of the day

silverer's picture

Did you mean "stitches"?

mily's picture

i'm sure camel shaggers are watchin price action. My guess is the meeting will conclude with "longer extension possible - to be decided in the next meeting in XXX in XXX months" never ending bullshit here we come

NoDebt's picture

9 months.... just long enough to get that ARAMCO IPO done.

 

silverer's picture

Meetings upon meetings, agreements upon agreements. Look where it landed. What this proves is that you really can fight the law of supply and demand. But you can't win.

stokr's picture

American fracking, destroyed OPEC, priceless.

Catahoula's picture

The world is and has been awash in oil. No reason to be long oil for years. No growth

AE911Truth's picture

 

This circus is intended to distract you from the death of the petrodollar, and the rise of its replacement.