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OPEC by the
numbers. To fall into the range that OPEC set out in Algiers – between 32.5 and 33.0 million
barrels per day – OPEC will need to cut between 600,000 and 1.1 million barrels
per day. Taking the midpoint, or about 900,000 barrels per day, would go a long
way to erasing the global supply surplus.
However, Saudi Arabia is reportedly on board with an
aggressive approach: Making cuts of 1.1 mb/d in order to take output down to
32.5 mb/d, plus asking Russia
and other non-OPEC countries to contribute another 500,000 to 600,000 barrels
per day in reductions. If that were to occur, the agreement could take 1.6 percent
of global supplies off the market. OPEC has surprised and disappointed the oil
markets many times in the past two years, so nothing should be taken for
granted. But if a deal is signed, oil prices could rise substantially. A survey
of analysts conducted by The Wall Street Journal finds that oil watchers think
prices would rise to $55 per barrel if OPEC succeeds, but could fall to $40 per
barrel or less if they don’t. Needless to say, the stakes are high.
Rising oil
prices a boost to U.S.
shale. IEA executive director Fatih Birol sees oil prices climbing to about $60
per barrel if OPEC succeeds in cutting output. That would be a boon to OPEC but
it could also provide a spark to U.S. shale, which is already
holding up with oil prices below $50 per barrel. Production from the Permian
basin in particular will continue to soar if oil prices rise. Already very
profitable at today’s prices, the Permian has captured a growing share of
global oil investment this year. If output from the U.S. rises, the IEA says the OPEC
deal could lead to another downturn in prices within nine months to a year. In
other words, the OPEC deal may only provide a short-term boost to prices, which
will lead to higher output and another downturn.
Dollar
continues to climb. The markets are expecting a near 100 percent chance that
U.S. Fed Chair Janet Yellen hikes interest rates in December, with further
action expected next year. That is pushing up the value of the dollar and
leading to losses for emerging market currencies around the world. The dollar
is at its strongest level against a basket of other currencies since 2003,
forcing central banks around the world to respond to protect the value of their
currencies. The stronger dollar is providing a check on rising commodity prices
– oil fell on Friday because of gains for the greenback.
China provides aid to Venezuela,
takes more oil. Cash-strapped Venezuela
turned to China for
financial assistance, and China
agreed to invest $2.2 billion in the South American OPEC member in exchange for
a higher take of its oil production. Due to past investments, Venezuela has been sending some 550,000 barrels
per day to China.
Between 2007 and 2015 China
poured about $65 billion into Venezuela
and has been paid back in oil. After the latest agreement is signed in
December, China
will have the rights to 800,000 barrels per day of Venezuelan oil. The Chinese
investment could help stabilize Venezuela’s
output by upgrading infrastructure.
Peak oil
demand. The Economist added its voice to the growing chorus regarding the
prospect of a peak in oil demand. The magazine argues that the world needs to
prepare for a post-oil age, even if that era is not yet upon us. Instead of a
sharp decline in consumption, The Economist says that the end of oil will be
more gradual, and largely due to a shift in investment away from fossil fuels
and into alternatives.
OPEC cuts
could hurt tanker industry. Fewer tankers filling up and departing from the Middle East will put a dent in the business for oil
tankers. Bloomberg estimates that the proposed cuts from OPEC would reduce the
equivalent of five supertankers’ worth of crude oil. This comes at a time that
the tanker business is struggling from an expanding tanker fleet, which is
putting pressure on day rates. Plus, higher oil prices could slightly slow
crude oil demand, which could further reduce oil trade.
EPA
increases biofuel requirement. The U.S. EPA released final numbers for its 2017
biofuel mandate, handing the oil industry a huge loss. The EPA will require
19.28 billion gallons of biofuels to be blended into the U.S. fuel
supply, much higher than the 18.8 billion gallons the agency proposed in May.
The figures will require 15 billion gallons of corn-based ethanol and 4.28
billion gallons of more advanced biofuels. The battle over the renewable fuels
mandate is one that pits powerful Midwestern farmers against the oil
industry.
In our
Numbers Report, we take a look at some of the most important metrics and
indicators in the world of energy from the past week. Find out more by clicking
here.
Thanks for
reading and we’ll see you next week.
Best
Regards,
Evan Kelly
Editor, Oilprice.com
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