The story of over-supply is wreaking havoc with oil stocks and the energy market as a whole. Months after OPEC agreed to cut production, non-OPEC and OPEC countries alike are in intense negotiations to extend the current oil deal.
The current deal involves 11 OPEC members and ten non-OPEC countries including Russia.
“Saudi Arabia led OPEC decided to cut production by 1.2 million barrels per day and the Russian-led non-OPEC agreed to reduce production by 0.578 million barrels per day. While OPEC as a group remains in full compliance with the agreed deal, many within the OPEC are yet to reach the stipulated level of production. Non-OPEC cuts have reached 65 percent of the stipulated target.”
The next OPEC meeting is in May; however, delegates from the countries involved are discussing an extension to the deal and talks could break down at any moment. If this agreement falls apart in the meantime, oil prices will be getting comfortable below $50 per barrel.
Iraq: a serious threat to domestic oil stocks
For years following the 2003 U.S.-led invasion of Iraq the country was exempt from OPEC’s production quotas. While this is no longer the case, bad habits die hard.
Iraq is OPEC’s second largest producer and key to the success of OPEC’s agreement signed in November of 2016.
Nick Cunningham of Oilprice.com reported that,
“But Iraq has lagged behind other OPEC members in its efforts to reduce output. It agreed to cut production by roughly 210,000 bpd from October levels, requiring it to average an output level of 4.351 mb/d over the course of the six-month compliance period between January and June.”
Check out this image that highlights growing production from the middle east nation.
image source: http://www.zerohedge.com/news/2017-03-20/single-biggest-threat-opec-deal-extension
Iraq’s oil minister has made some very ominous comments with regards to ramping up production.
Cunningham continued,
“Iraq remains more of a question mark. That uncertainty was all the more stark given the recent comments from Iraq’s oil minister, who said that that country would ramp up production capacity to 5 mb/d this year. “We achieved this great achievement of 4 million barrels per day … middle of 2016, and now we have climbed up and we are reaching about 5 million barrels per day beginning of second half of this year,” oil minister Jabbar Al-Luaibi said earlier this month at the CERAWeek Conference in Houston. When asked by CNBC how that would square with the possible extension of the OPEC deal for the remainder of 2017, Al-Luiebi said it would be “premature to comment,” since the extension is uncertain.”
Check out The Single Biggest Threat To An OPEC Deal Extension, to read more.
If Iraq can expand its capacity by close to half a million barrels, it could prove disastrous for the region, global oil prices and energy stocks in North America. Remember, no one wants to be the only one cutting, when others are reaping the benefits of selling cheap oil.
American Oil | Also to Blame for falling Oil Prices
With Trump in office, many of the country’s largest oil companies continue to be emboldened and some are rushing to spend.
Gaurav Sharma, a contributor to Forbes, highlighted Trump’s bias in a late January article, explaining,
“…an overhauled White House website proudly declared its new found pro-energy industry credentials. Guidance on climate change – a key feature of the Obama administration’s policy framework – was swiftly erased from the site.”
Remember, former ExxonMobil CEO Rex Tillerson is Trump’s Secretary of State, while former Texas Governor Rick Perry is the Energy Secretary’s chair. These guys are as pro-oil as you can get.
Higher production in the U.S. is supported by the latest U.S. drilling data. 14 oil rigs added in the week to March 17 brought the total to 631, the most since September 2015, according to energy services company Baker Hughes.
The US crude oil rig count has now risen 63% year-over-year. Check out the below chart, provided by Market Realist, which highlights the recovery in drilling activity.
John Kilduff, partner at Again Capital in New York, commented,
“I think oil is reacting still to the steady rise in the U.S. rig count and the realization that momentum is building to the downside from the repositioning of speculative interests in the market.”
source: http://www.reuters.com/article/us-global-oil-idUSKBN16R017
Carsten Fritsch, senior commodities analyst at Commerzbank, told Reuters that, “The continued increase in U.S. oil rigs adds to the bearish sentiment.”
With supply soaring and OPEC on the edge, oil prices have fallen off the same cliff they climbed in November and December.
WTI crude hit a low of $47.99 per barrel Tuesday.
The S&P Global Oil Index, which measures the performance of 120 of the largest, publicly-traded companies engaged in oil & gas exploration, extraction & production from around the world, has been drifting lower.
After touching 1,818 on December 13th, the index has declined to below 1,700. Trump’s pro-energy policies have ironically lead to oil becoming less profitable in the short-term. With the US recovery in full swing, all eyes will be on OPEC as their commitment to reign in production will determine the price of oil and oil stocks as we head towards the summer months.
