Alexander Khurshudov: OPEC pleased the American president with its forecast
Another oil market report published on October 11, 2018 by the OPEC on the global oil production and consumption in 2018-19 seemed interesting to me.
The organization expects oil production (together with condensate and natural gas liquids) to increase by 2.2 mln bpd this year, while the consumption is supposed to increase by just 1.56 mln bpd. Next year the overproduction will intensify: with the production increment of 2.25 mln bpd the consumption will increase by just 1.36 mln bpd. A simple calculation shows that the global oil stocks are supposed to add 558 mln barrels.
I think this forecast was a nice surprise for the American president. He has been furious with the nasty organization, blaming it for taking advantage of the poor Americans, and here it is – he’s got what he wanted! He forced the Arabs to increase production, which led to the decrease in crude oil price. Gasoline price in the US decreased by 13.4%. Everybody knows that American voters love cheap petrol more that their campaign slogans, so they will support the Republicans at the elections.
Full of enthusiasm I was about to finish the message when I decided, out of curiosity, to find out where the OPEC is going to get these additional barrels from. It turned out…from the South and North America – from Brazil, Canada, the US.
This is true, the new Brazilian government generously distributes deep offshore licenses to Western companies, which have rushed to invest into production making it surge by 4.8%. Though it is just 0.126 mln bpd, nothing (0.15%) compared to the global production.
Three times more (0.36 mln bpd) was the production increment in Canada. With the total production of 4.83 mln bpd it took the fifth place in the global production rating. However, there are problems - almost 60% of the oil produced is extra heavy. Its quality is worse; it sells with the discount of $10-17 against the WTI. It has to be mixed with light oil or condensate before it can be transported and it takes vessels to storage it, which are almost full. Besides, the demand for the Canadian oil is declining for it is becoming more difficult and expensive to ship it. As a result of the oversupply the price for the Canadian oil in October dropped to $20 for a barrel.
According to the OPEC, the US is supposed to become the main oil producer, with 11 mln bpd crude production by the end of this year and 12.34 mln bpd in a year’s time. Plus the additional 4 mln bpd of condensate and NGLs.
The OPEC didn’t dwell on its own plans for next year. Its combined production in September amounted to 32.76 mln bpd, which is 570 thousand bpd more than half a year ago. The Saudi Arabia, Kuwait and the UAE reached the level of November 2016. Production in Libya grew to 0.9-1 mln bpd, while production in Venezuela halved compared to the maximum, reaching 1.2 mln bpd. The report humbly says that the OPEC doesn’t have to produce as much oil in 2019, so the production may decrease by 0.9 mln bpd.
However, this is the matter of the future. Meanwhile the price for oil is still decreasing. I expected this to happen in September, but the Brent price jumped over the trend limit, to $86.7, so that it was easier to fall. The daily charts show a revolutionary decline by 16.2% (pic.1). Remember the people who predicted the Brent to reach $100 by the New Year?
As a result, the long-term uptrend was broken (pic.2) abruptly because of the oversupply and manipulations with information. Now I expect the price to bounce back to the level of $80, followed by a decrease, which will be backed up by the strong decline at the stock exchange.
The monthly charts (pic. 3) indicate the primary objective of the downward movement. It is at the level of $67. It may take 2-4 months to reach.
It will be clear by the spring whether the oil price will increase or not. By the time the situation with stock market decline, the commercial oil stocks increase, the US rig count change and the OPEC’s additional capacity will become clear. The only thing that doesn’t change is the American president’s optimism.