OPEC Overproduction To Create Problems In Vienna

Friday November 18, 2016

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. OPEC's job getting harder

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- In Algiers at the end of September OPEC members pledged to cut their collective output to a range between 32.5 million barrels per day and 33.0 mb/d.
- At the time, it appeared to be a heavy lift although it would be doable, requiring cuts between 200,000 and 700,000 barrels per day.
- But since then, several members continued to boost output ahead of the Nov. 30 meeting.
- Production is now up to 33.6 mb/d, which means OPEC will need to cut between 600,000 and 1.1 mb/d to fall within that range.
- Members are now in the middle of a final diplomatic push to overcome hurdles, and Russia has signaled its tentative support. But convincing Iran and Iraq to cut, the two biggest obstacles to a deal, will prove difficult.

2. Saudi Arabia set to unveil oil reserves

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- Saudi Arabia is preparing to publish data on its oil reserves, a closely guarded state secret that it has not updated since the 1980s.
- It is unlikely that Saudi Arabia's oil reserves have stayed constant at 260 billion barrels for three decades, as the government insists. But the data has been kept under wraps and the world has been left to speculate.
- Saudi Arabia is planning a partial IPO of Saudi Aramco in 2018 in order to bring in about $100 billion. But in order to do so, it has to publish data for investors.
- That could at last provide the world with a look at Saudi Arabia's oil reserves.

3. Oil demand set to grow

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- In its annual World Energy Outlook, the IEA threw cold water on a lot of recent projections regarding peak oil demand. The IEA does not see peak oil demand before 2040.
- Renewables take a larger share in the electricity market, and EVs and efficiency edge out some oil in the transportation sector, but the changes are gradual.
- In particular, transportation will be a tough nut to crack. In its central scenario, the IEA expects EVs to displace just 1.3 mb/d of oil demand by 2040. But those declines in demand are offset by gains in demand from the petrochemical, aviation and freight transit sectors.
- A more aggressive climate-friendly scenario has EVs eating into 6 mb/d. But that is predicated on a lot of policy that is not guaranteed to be forthcoming.
- In its central scenario, the IEA sees total liquids demand rising by about 13.6 mb/d through 2040.

4. Libya output rising

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- OPEC's task to stabilize oil prices will be made a lot harder by rising output from within.
- The cartel saw its collective output rise by about 236,000 barrels per day in October compared to a month earlier.
- Libya is one reason for that. After suffering war and political instability, which has kept output at about 300,000 barrels per day for the last several years, the country is finally returning disrupted output to market.
- Several major oil export terminals are coming back online. Production is now up to 600,000 barrels per day.
- Libya is targeting 900,000 barrels per day by the end of the year. Libyan gains essentially offset the promised cuts from the yet-to-be-signed OPEC deal. From there, Libya is promising more, aiming for 1.1 mb/d next year.

5. Natural gas storage rises to record high

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- Natural gas storage levels hit a record high last year as mild weather cut into demand, and drillers continued to add supply.
- The glut pushed natural gas prices down below $2/MMBtu.
- But analysts thought that prices would rise towards the end of 2016 and into 2017 because natural gas supply is finally falling.
- However, in the first week of November, storage levels jumped to a record high 4,017 billion cubic feet.
- Prices are not as low as they were last year, despite the record storage injection. The EIA expects gas demand to be 8 percent higher this winter, although the cold season has gotten off to a mild start.

6. U.S. exports record high LNG

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- The U.S. is flush with natural gas supplies, but one reason to be bullish on prices is that the U.S. is exporting a growing volume of gas abroad.
- November will mark the highest amount of gas exported on record, with 9 LNG tankers set to depart Cheniere Energy's (NYSE: LNG) Sabine Pass export facility.
- So far, LNG shipments this year have set sail for a variety of destinations, including the Caribbean and Western Europe.
- The demand pull from LNG exports could soak up some of the excess supply in the U.S., although LNG makes up a small share of overall demand.

7. Decline rates cut into supply

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- Oil fields suffer from depletion over time as oil is produced and reservoir pressure declines.
- Estimates vary widely from field to field, but the IEA believes that on average, oilfields around the world decline by about 6.2 percent per year after they have passed their peak.
- Constant investment is required to prevent steeper decline rates. Without ongoing investment to boost reservoir pressure, the decline rate would be closer to 9 percent, the IEA says.
- The drop off in investment over the past two years will lead to higher decline rates. By 2020, depletion could cut into global supplies by about 450,000 barrels per day.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.