OPEC will meet this coming week after a six-month period in which one could argue the group had racked up a record of success it had not seen in a long time. Then why does it feel like there’s a feeling of failure around the Vienna gathering?
When OPEC last met in December, the price of crude oil as measured by Brent was either side of $60/barrel. Today, it’s near $66/barrel. But about two weeks ago, it was at that $60 level after having topped out near $74/barrel in the third week of April. The move off of $60 in the second half of June had a lot of artificial help – a series of explosions in the Persian Gulf region that allowed geopolitics to boost prices.
At its December meeting, OPEC pledged cuts of 800,000 barrels per day (b/d) from October 2018 levels. What it actually did was impressive – from what S&P Global Platts said was all-time high OPEC production of 33.08 million b/d in November 2018, the group produced just 30.09 million b/d in May.
And yet global inventories increased and the price ultimately came back to where it started. But that $60/b Brent price of the last OPEC meeting was down to $50 by Christmas Eve. Where would it have ended up without those deep cuts?
All in all, one can argue that it’s been a job well done by the group that often gets characterized as being completely incompetent in its self-proclaimed role as the guarantor of Goldilocks prices – not too high, not too low.
But OPEC now faces the stark data that says even at current production near 30 million b/d, it’s too much for 2020. The International Energy Agency (IEA), in its June report, said the “call” for OPEC crude in 2020 would average 29.3 million b/d. The call is derived by taking the IEA estimate of global oil demand, subtracting estimated non-OPEC output (which it sees rising significantly next year after a banner year in 2019), subtracting OPEC’s estimated output of natural gas liquids like propane, and what’s left is the call. It’s what OPEC would need to produce to keep the supply/demand balance in check. OPEC output is currently less than the present call.
But even after slicing 3 million b/d from November to May, OPEC finds itself about 700,000 b/d above the call for 2020. That’s due to forecasts of a combination of good but not great demand growth, and lots of new non-OPEC output including countries beyond the U.S.
All the pre-meeting forecasts are that OPEC will roll over its existing cuts. In some ways, it’s an empty gesture; most of the countries blew through their required cuts anyway. Saudi Arabia far exceeded its reductions and at 9.7 million b/d, it’s at the lowest level of production for the Kingdom in years.
But the challenges for the group go beyond that gap between its current output and the call. OPEC output was reduced this year not only by cuts from countries like Saudi Arabia but by a sharper-than-expected drop from Venezuela and the bite of U.S. sanctions on Iran. Reuters reported this week that Iranian exports are down to about 300,000 b/d. Before the reimposition of U.S. sanctions, they were about 2.5 million b/d.
Therefore, the combination of planned and unplanned cuts has OPEC about 700,000 b/d above its 2020 call even after “contributions” from some countries that can’t easily be repeated, unless Iran and Venezuela head to zero.
OPEC has also been frustrated that despite its deep cuts, global stocks haven’t declined. For example, stocks in OECD nations at the end of March stood at 2.85 billion barrels. A year earlier, they were 2.815 billion. Total U.S. stocks of all crude and products, in the Energy Information Administration report released this past week, stood at about 1.3 billion barrels. That’s more than when OPEC began its cuts. OPEC watches that number very closely.
So an extension of the existing pact is expected. There has been little buzz about making it deeper, even just to put into an agreement the cuts that already have been made in excess of the December targets. The actual numbers in any deal are significant. But given how much uncertainty is in the market about the levels from Venezuela, Iran and to a lesser degree Libya, the targeted numbers are subject to a great deal of flux.
But there is one other piece of news that remains uncertain going into the meeting and that is what Russia and its non-OPEC allies will do. That group had promised cuts of 400,000 b/d back in December but adherence to that was far from perfect. Russian supplies did take an unplanned dip when batches of contaminated crude flowed down a key pipeline beginning in April, a crisis that may or may not be over. (News reports are in conflict.)
There has been noise out of Russia from some of the country’s key producers that they aren’t interested in continuing the agreement. Watching the level of OPEC/non-OPEC cooperation will probably be the most interesting development to come out of the meeting.
The preparatory work for IMO 2020 took a significant hit this past week with the closure of Philadelphia Energy Solutions (PES), the U.S. East Coast’s biggest refinery at 335,000 b/d.
Although it was the gasoline market that shot up the most on the back of the news that the owners of the recently bankrupt plant decided to throw in the towel after a spectacular fire and explosion a week earlier, there are impacts on diesel as well.
First, the refinery produced 75,000 b/d of diesel and 25,000 b/d of jet fuel, both of them distillate products, according to S&P Global Platts Analytics. That loss of 100,000 b/d of distillate products right before the launch of IMO 2020 is a hit the market did not need.
But second, the refinery was operating at about 270,000 b/d, according to Platts. That means it was sitting on almost 40,000 b/d of unused refining capacity.
One of the ways that the forecasts suggest the world will get the distillate products needed to make fuels that comply with IMO 2020’s new, more stringent sulfur rules on marine fuel is that refiners would just run more crude or intermediate products to get enough diesel-like products to make up for the high sulfur fuel oil that no longer will be able to be used in ships because of its sulfur content. If that meant that the world got more gasoline or other products than it needed, well, so be it. Good for gasoline consumers.
So 40,000 b/d of unused capacity on the U.S. East Coast would have been a nice place to run some of those extra barrels. Maybe the profits from making more product to meet IMO 2020 needs would have been enough to save the PES refinery, whose trip in and out of Chapter 11 clearly wasn’t going to be enough to save it.
But the fire and the explosion ended that. For those worried about IMO 2020 and its impact on prices, this was not good news.