I won't rehash the OPEC deal, and yesterday's follow up, but let me raise a few relevant points and graphics. Know that many have a few more doubts about Russia keeping its 300,000 b/d reduction than OPEC members keeping theirs. This was the first time in 15 years that Russia agreed to join OPEC to lower output but Russia has deferred cuts in the past and could easily claim "technical issues" in not meeting its obligation. Technical issues...yeah, yeah, that's the ticket.
For example, Russia could just lower its production based on its planned increase for 2017, and report that as its contribution. Russia has taken key measures to weather the downturn in prices, such as devaluing its currency which lowers production costs and "boosts the Kremlin's spending power," and is now producing at a post-Soviet high. As for OPEC, November's output climbed to a record level of just under 34.2 million b/d. And FYI: these cuts will be re-examined after six months.
Prices for prompt Brent and WTI benchmark futures contracts have hit their highest in nearly 18 months, but the rush by the shale industry to hedge could cap the rally. U.S. shale oilers can make a major rebound with oil at $55, but the industry's resilience is now really based on allowing the higher oil price to be sustained. If not, OPEC members could ramp up production and push oil back down to $35. An important number even now because: "Acreage in Texas' Permian basin is getting pricey as its low-cost production lures more buyers."
U.S. companies are well placed, however, to refocus on their production businesses if benchmarks can stay above the $50 level for a while. At that rate, "Raymond James determined that 13 of the 18 plays could produce a before-tax internal rate of return of 15%" (here). Things are indeed looking up: per EIA, over 90 publicly-traded international oil companies reported a collective profit in the third quarter of this year, the first quarterly profit since the end of 2014.
The group earned a combined $2.3 billion this third quarter, a drastic reversal from a $54.1 billion loss in the third quarter of 2015. Fracking legend Harold Hamm, a strong contender for the next U.S. Energy Secretary, says that the U.S. has the capacity to produce 20 million b/d of crude - more than double our current output!
And remember that numerous other producers highly dependent on oil sales already have installed plans to increase production as much as possible - no matter what OPEC and friends decide. Mexico's deepwater auction last Monday, for instance, was a huge success, awarding 8 of 10 available blocks on its side of the Gulf (here). I've seen estimates as high as 70 billion barrels in Mexico's side of the Gulf. As oil prices rise, this treasure trove becomes more accessible and desirable.
And Brazil has been pumping crude at record-high levels this year, with production hitting 2.6 million b/d in August, as foreign companies can now be foreign operators on pre-salt projects. Now that state-owned Petrobras isn't obliged to take a 30% stake in every new development and provide proportionate funds for its development, most of the financial burden even when prices are low will fall on the foreign operators. In Canada, "Trudeau's Pipeline Approval, OPEC Deal Resurrect the Oil Sands," there's a massive 275,000 b/d capacity expansion coming online next year alone.
Overall though, OPEC is now trying to cut inventories more so than increase oil prices. At the end of the third quarter, there was over 3 billion barrels of oil sitting in commercial storage in the OECD members. More sale ready, there's more than 100 million barrels of oil are being hoarded on sea vessels alone, a pot that could be de-stocked as sharp declines in contango for crude oil futures continue.
And finally, Russia's energy minister is behind in justifying that the U.S. wasn't invited to Saturday's cooperation meeting because "it's not an oil exporter." Very quietly apparently, thanks to liberalization at the end of 2015, we are now exporting crude to 16 countries and have shipped out as much as 700,000 b/d of crude this year (here)...with total oil exports hitting an incredible 5.3 million b/d last week (here), versus 2.8 million b/d for the same week in 2012.
Along with the highest U.S. oil rig counts seen in over 10 months, rig mobility, multi-well pad drilling, long laterals, and frac optimization have made the U.S. shale business far more resilient than OPEC ever could have imagined. Take the low-cost Permian that can produce at $35 oil, "Chevron claims a 30% reduction in Permian development costs."
OPEC's Production Cut Details
Source: JTC
A Long History of Cheating Makes OPEC Not a "Cartel," but a "Clumsy Cartel"
Source: special thanks to Mohamed Ramady and Wael Mahdi, page 71 (great book guys!)
Breakeven Oil Prices For Selected OPEC Nations
Sources: IMF; JTC
