OPEC Close to Maxing Out

This article was published by The McAlvany Intelligence Advisor on Monday, July 16, 2018:

What’s becoming clearer all the time is that when OPEC agreed to reverse its oil production cut agreement back in June and add back a million barrels of oil a day to world supplies, it failed to consider the fact that many if not most of the cartel’s members were already close to being maxed out. Add to that various unexpected disruptions to supply, and the nakedness of OPEC has now been revealed for all the world to see.

It was Tuesday’s announcement by the Paris-based Energy Information Agency (IEA) that tore the cover off OPEC: with Saudi Arabia being forced to make up for the shortfalls of the cartel’s other members, the IEA said the Saudis “might be stretched to the limit” if another unexpected disruption occurred.

Saudi Arabia has always kept in reserve additional capacity as a bargaining chip and a tool to offset supply disruptions. But with it being forced to be the primary source of that new supply, the world now knows that the Saudis have about hit their limit. It’s no wonder that the prince is pushing his Vision2030 program so hard: he sees the handwriting on the wall. He can’t out produce the Americans and so he has to diversify his economy or run the risk of having his country being left behind during his reign.

Disruptions have driven the world’s oil price from $41 a barrel in January 2016 to $70 last Friday.  Those disruptions include the implosion of production by Venezuela’s state-owned oil company PdVSA from over 3 mbd to less than half that currently; the drop in oil delivery from Libya from 1.3 mbd in February to just over 500,000 barrels a day, following recent oil port closures; the strike by hundreds of oil field workers in Norway following failed negotiations on a proposed wage hike; a power outage at Canada’s Syncrude oil sands facility taking another 350,000 barrels a day offline; and U.S. sanctions on Iran expected to take hold later this year which are estimated to cut in half Iran’s present oil exports of 2.5 mbd.

Taken all together then, forecasters were pessimistic that OPEC’s efforts (i.e., Saudi Arabia’s) to ramp up crude oil production to offset these losses would succeed, and crude oil prices rose in response.

Those increases made President Trump increasingly nervous, especially as the November mid-term elections draw ever closer. At first he asked Saudi to increase its production to keep oil prices inline. Then he went public with his demand, claiming that OPEC was deliberately keeping oil off the market.

As Bob McNally, a former energy advisor to then-President George W. Bush, put it, “Few things terrify an American president like rising [gasoline] pump prices.”

On Tuesday, following the report from the IEA, word got out that Trump’s  administration was considering tapping into the country’s Strategic Petroleum Reserves – some 660 million barrels of crude oil stored in salt caverns along the Gulf Coast of Texas and Louisiana – to keep oil prices from moving higher. That the timely release of this discussion was more than likely political is clear from the reality of turning on the spigots from those SPR reserves. Although they contain more than 660 million barrels of crude oil, the maximum withdrawal capability is only 4.4 mbd, and those reserves  wouldn’t even begin entering those refineries’ pipelines until 13 days after his presidential executive order. In addition, it assumes that there would be sufficient capacity among those Gulf Coast refiners to take on the additional supply.

Once word got out that Trump was considering tapping the SPR, oil went into a tailspin, dropping $5 a barrel for August delivery, and closing on Friday just above $70.

With America shortly to become “the World’s Leading Producer of Crude Oil,” according to the U.S. Energy Information Agency, the game is all but over. While Saudi Arabia and its cartel members have about hit their limits, no such limits apply to America’s oil producers.

Sources:

The Wall Street Journal: U.S. and Allies Consider Possible Oil-Reserve Release

5-day graph of prices of August delivery of crude oil

6-month graph of prices of August delivery of crude oil

Maximum graph of prices of August delivery of crude oil

RigZone.com:  World’s Oil Cushion Could Be Stretched To The Limit, IEA Warns

Background on US’ Strategic Petroleum Reserve (SPR)

Background on the IEA

Businesslive.co.za:  Oil rises on supply disruptions in Norway and Libya

Reuters: Oil rallies as supply disruptions seen from Canada to Libya

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