The events in the U.S. and global oil markets of last week were rapid and overwhelming. If you couldn’t keep up, here’s a summary of what happened:
OPEC: OPEC met on Thursday. Its meeting was supposed to last just a few hours and the usual late-afternoon press conference with the media was scheduled. The talk was that OPEC was going to find a way to cut 1 million barrels per day (b/d) of oil output, an amount the market found inadequate given rising supplies, particularly from the U.S., and demand growth projections that had begun to soften. (Note that it takes a full-blown financial crisis for demand to go down year-on-year; the only question most years is just how much it will rise in the next 12-month period.) But what role Russia might take in cutting output was unknown as of Thursday, so OPEC cancelled the press briefing and said: we’ll do it again tomorrow.
What resulted on Friday was by most analyses a victory for a group facing a growing market surplus next year. OPEC agreed to cut a total of 1.2 million b/d out of the market, with 800,000 b/d of that coming from OPEC—mostly Saudi Arabia, as usual—and 400,000 b/d coming from non-OPEC countries, with Russia contributing a little less than 250,000 b/d and countries aligned with Russia expected to contribute the rest. (Countries like Kazakhstan and Azerbaijan would be the most likely candidates.) This is a significant step toward balancing a market that, based on recent numbers, is seriously out of whack next year, which would be good news for consumers.
There is a number among the reams of data that can be quickly looked at to determine the market’s balance. It’s the OPEC call, and it is produced by taking the estimate of global demand coming from groups such as the International Energy Agency (IEA) and first taking out the estimate of what oil production will be from countries that aren’t a member of OPEC. (That’s about 65% of the world’s supply.) A category known as OPEC LPGs is taken out—liquified petroleum gases such as propane and butane—and what’s left is the OPEC call. The call fluctuates quarterly, because demand does so as well. The OPEC call can then be compared with actual OPEC production, which according to S&P Global Platts was a bit more than 33 million b/d in November. But the IEA call for 2019 is less than 32 million b/d each quarter of 2019 (and the first quarter is less than 31 million b/d). That’s what OPEC faced for next year and why it cut the amount it did.
‘Worthwhile Canadian Initiative’: That headline from a New York Times column of many years ago was once labelled the dullest ever. But what Canada did last week—specifically, the province of Alberta, home of Canada’s oil industry—was anything but dull. Alberta ordered a cut of 325,000 b/d of production. This is generally seen as unprecedented, and on top of the 1.2 million b/d that OPEC agreed to reduce in tandem with Russian and others takes output cuts up to 1.5 million b/d. That is taking it down toward the levels of the highest OPEC call next year—31.5 to 31.6 million b/d in the second half of the year—and can only lead to the conclusion that what happened last week mattered and shouldn’t be dismissed easily.
Market reaction: But despite all that, there is little sign on Monday that markets were overly impressed with the cuts. They did bounce back on Friday as the news from Vienna was more bullish than the 1-million b/d cut floating around on Thursday. But at 11 a.m. Monday, the benchmark WTI price on CME was $51.92 compared to a settlement last Monday, before OPEC but just after the announcement of the Canada cuts, of $53.08. ICE Brent Monday was $61.27 at 11 a.m., which actually had moved higher than the prior Monday’s close of $61.27. But the ultra low sulfur diesel 11 a.m. price Monday of $1.8861 was less than the prior Monday settlement of $1.8931. So while the OPEC deal may have arrested a slide in the price, as of December 10 it had not propelled it to a significant higher level.
The United States, energy giant: Two things happened last week that drive home the growing strength of the U.S. market. First, the Department of Energy’s Energy Information Administration in its weekly report revealed that in the week ending November 30, the U.S. was a net petroleum exporter. The criticism of that number started right away: weekly numbers are subject to revision and it took too much of a drop from the recent trend to be anything but an outlier. Still, the U.S. is trending in that direction, and even if that report that showed the net petroleum imports in the last week of November were a negative 211,000 b/d gets reversed in coming weeks, it’s still marks the first time there’s been a negative number in that category since the 1940s.
The second item in the U.S.—Energy Giant category came out of the Department of the Interior. Interior reported numbers out of the Wolcamp Shale and part of the Delaware Basin section of the Texas/New Mexico Permian Basin that it said showed the largest contiguous petroleum discovery ever in the U.S. The estimate: 46.3 billion barrels of oil, 281 Tcf of natural gas and 20 billion barrels of natural gas liquids. The resources are defined as “technically recoverable.” It’s simplistic to do this calculation, but it is stark nonetheless: if all those barrels could be recovered, and the U.S. continued to consume about 20 million b/d, this new discovery could supply the U.S. for about 6.3 years without importing another barrel or producing any oil anywhere else in the country.