In morning trade, Aug WTI oil prices moved back into positive territory
after extending Friday's losses overnight, falling to around the $63.60/barrel
area. A key driver of this reversal is a recent Bloomberg article out that reported
that OPEC is said to be weighing a 300,000-600,000 barrel per day (bpd) output hike.
This would be considered small versus prior estimates, which ran up as high as 1.8 million bpd under the scenarios given by leading players in the deal including Russia and Saudi Arabia.
Since estimates of 300,000-600,000 is the recent update, we can see why oil has recovered from recent selling pressure. As in just about any market, there are a handful of catalysts on both sides, bullish and bearish.
To give just one example to put this in some perspective.... The unfortunate situation going on in Venezuela may cause oil production to fall from approximately 1.4 million to closer to 1 million barrels per day... a 400,000 decline, which is just above the mid-point of the possible OPEC/non-OPEC increase.
On June 22, major OPEC and non-OPEC members will meet in Vienna, Austria for the 174th OPEC meeting to discuss the oil market.
The main topic will be whether to reverse, or partially reverse, supply curbs that were initially put in place on January 1, 2017. At this point, there are so many options being discussed. However, the bottom line is that it seems most likely that they will raise production.
What's this all about?
After oil prices tanked in late 2014, key OPEC and non-OPEC oil producers began talking about what to do to ease the pressure of weak prices and the global supply glut.
To get to the point, these key OPEC and non-OPEC oil producers agreed in November 2016 to cut oil production for six months, beginning on January 1, 2017.
Then in May 2017, these same producers agreed to extend this six month deal for another nine months (so through March 2018). But then in November 2017, it was agreed upon to extend the deal through the end of 2018.
What was the original deal that was put in place on January 1, 2017?
In short, the deal was that select OPEC and non-OPEC producers would cut a collective total of 1.8 million barrels per day (BPD) of oil production to reduce the global glut of oil that was previously weighing on oil prices .
Who was responsible for what?
In total, there have been 25 producing countries involved in this deal... 14 OPEC countries, 11 non-OPEC countries.
Who are the OPEC members involved?
Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola and Equatorial Guinea.
- On the OPEC side, Nigeria and Libya were exempt from the deal due to civil unrest in their countries.
- However, after the initial deal was put in place, both countries agreed to limit their combined production to 2.8 million bpd.
- Meanwhile, back then, Iran was allowed to raise production slightly as sanctions were lifted.
Who are non-OPEC members involved?
Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, Sudan.
Why is Eq. Guinea listed twice? Equatorial Guinea actually joined OPEC in May 2017, clearly after the deal was in place. It initially contributed as a non-OPEC member and then after contributed as an OPEC member.
OPEC was supposed to be responsible in cutting 1.2 million bpd, while non-OPEC members were responsible for reducing production by 600,000, making up the 1.8 million bpd total.
Why now? Why raise oil output (therefore, unwinding the OPEC/NOPEC oil cut deal) now?
The main reason for this talk is because they have reached their goal.
The whole goal was to reduce the global oil glut. The global oil glut was measured by the OECD commercial stocks number, which can be found in OPEC's monthly Oil Market Report, and the overall goal was to get inventory below the 5-year average.
Just recently, commercial stock fell below the 5-year average. We can see, for example, in the June 12 OPEC Oil Market Report that Preliminary data for April shows that total OECD commercial oil stocks fell by 6.7 mb m-o-m to stand at 2,811 mb, which is 26 mb below the latest five-year average, but remain 240 mb above January 2014 levels.
No question, there will be daily updates ahead of the June 22 OPEC meeting, so keep your eyes open.
In current trade, Aug WTI crude oil futures are +$0.09 at $64.94/barrel.