opec extended production cuts: why prices fell consulting services, inc. artberman.com slide 1 opec...
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Slide1LabyrinthConsultingServices,Inc. artberman.com
OPECExtendedProductionCuts:WhyPricesFell
• Lastweek’spriceplungewasthethirdtimein2017thatpriceshaveadjusteddownwardtowardthe$45perbarrellevelsuggestedbymarketfundamentals.
• IEAcalculatedthatrecentproductioncutsearnedthecartelanadditional$75millionperdayyear-over-yearinthefirstquarterof2017.
• OPEC’sgoalhasbeentokeepafloorundercurrentpricesbutthemarketexpectedthecarteltomovepriceshigherthroughinventoryreduction.
• OPECwassatisfiedwithgreaterrevenuesfromhigherpricescomparedtoayearago,butthemarketwanteddeeperproductioncuts.
• OPECtakesthelongviewbutthemarketisconcernedwiththenearterm.• OPECextendedthecutsandthemarketreactedwithlowerprices.
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NYMEXW
TIFuturesPrice($/barrel)
ThirdDeflationoftheOPECExpectationPremiumin2017
The OPECExpectationPremium
Source:EIA,Bloomberg &Labyrinth Consulting Services,Inc.
$45PerBarrel
February-MarchDeflation
April- EarlyMay Deflation
LateMay
Deflation
Slide2LabyrinthConsultingServices,Inc. artberman.com
OPEC’sGoal:KeepaFloorUnderOilPricesWithoutHelpingCompetitionTooMuch
• Atfirst,OPECdidnothingafteroilpricescollapsedin2014.• Whenpricesfellto$26perbarrelinearly2016,OPECfloatedtheideaofaproductionfreezeandthat
establishedafloorfromwhichpricesincreasedtomorethan$50perbarrelduringthefirsthalfoftheyear.
• InJune2016,marketslostfaithinOPEC’sresolveandpricesfellfrom$51tobelow$40perbarrel.• OPECthensetanotherpricefloorbyannouncingtentativeagreementonaproductioncut.• Whenpricesfellbelow$43inNovember,anotherpricefloorwascreatedwhenOPECenacted
productioncuts.• Theworldpricefloormovedupalmost75%from$26to$45perbarrelinjustoverayear.• Productioncutswereextendedlastweektoreinforcethecurrent$45floorwithouthelpingthe
competitiontoomuch—nottomeetmarketexpectationsofhigherprices.
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Oil-PriceVo
latilityIndex
NYM
EXW
TIFuturesPrices($
/Barrel)
OilMarketsContinueTesting$55Ceiling&$45Floor
NYMEXFutures
Price(LHS)
Oil-PriceVolatilityIndex(RHS)
$62
$55PerBarrelCeiling
Source:EIA,CBOE,Bloomberg &Labyrinth Consulting Services,Inc.
OPEC"Freeze"ProposedFeb2016
$43OPECCutNov2016
$26
$45Floor
$40OPECCutAnnouncedSept2016
Slide3LabyrinthConsultingServices,Inc. artberman.com
OiltradersBeganUnwindingLongPositionsinFebruary
• OiltradersunderstandthisbetterthananalystsandtheybeganunwindingtheirlongpositionsinFebruary.
• NetlongpositionsonWTIfutureshavefallen25%sincethenbutmostofthesell-offhasbeensinceApril2017.
• Longpositionscommonlyover-shootpricetrendsandpricesfallafterhighestlevels.• TermstructureofWTIfuturescontractsinfairlysteepbackwardationsincemid-April.• Priceslessthan$50/barreluntil2020.
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NYM
EXW
ITPrice($/barrel)
NetLongPositions(MillionsofBarrelsofW
IT)
NetLongFuturesPostionsHaveFallen17%SinceMid-April2017
NetLongPositions(LHS)
NYMEXPrice(RHS)
Source:CFTC, EIA&LabyrinthConsultingServices,Inc.
NetLongPositions(LHS)
NYMEXPrice(RHS)
Source:CFTC, EIA&LabyrinthConsultingServices,Inc.
&25%SinceMarch2017FebruaryPeak
AprilPeak
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$51
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$57
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NYMEXW
TIIPrice($/barrel)
TheTermStructureofFuturesContractsChangedAfterOPECProductionCuts
NOV302016
MAR242018
APR132017
May52017
MAY192017
25-May2017
Source:CME& LabyrinthConsultingServices,Inc.
Mar24
May5
May19May26
Slide4LabyrinthConsultingServices,Inc. artberman.com
ReasonsforLowerOilPrices
• ManyanalystsproclaimthatBrentpriceswillbenear$65bytheendoftheyear.• AlthoughIEAandEIAproductiondatasuggestsgoodOPECcompliancewiththeNovemberagreement.• IraqwillhaveahardtimemaintainingcutswithISISwarandotherfiscalpressures.• Russiaproductioncurrentlyinaseasonallowthatincreased500kb/din2H2016.
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43.5
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17
MillionsofBarrelsofCrudeO
ilPerDay
OPEC- NOPECCrudeOilProductionAtLowestLevelSinceJune2015
Venezuela
Iran
Iraq
Libya
Nigeria
UAE
SaudiArabia
Qatar
Kuwait
Angola
BaseAlgeria
Gabon-Ecuador Mexico
Russia
June2015
Source:EIAMaySTEO,EIAInternationalData&La
byrinthConsultingServices,Inc.
9.6
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10
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11
Jan Feb Mar Ap May June July Aug Sept Oct Nov Dec
CrudeOilProduction(m
mb/d)
RussiaCrudeProductionIncreasesSeasonallyEspeciallyin2016
2017
Source:EIAM
aySTEO,EIAInternationalData&LabyrinthConsultingServices,Inc.
2016
2015
2014
Slide5LabyrinthConsultingServices,Inc. artberman.com
ReasonsforLowerOilPrices
• Still,globalmarketsremainwellsupplied.• OPECshipmentstoitsbiggestcustomers—theU.S.andChina—aremorethan10%higherthanayear
ago.• Productioncutsarenotreflectedinwell-suppliedmarketsnorareglobalinventoriesfallingmuch.
Slide6LabyrinthConsultingServices,Inc. artberman.com
U.S.ProductionConcernsAreReal
• MarketconcernsarevalidthatU.S.tightoiloutputmaycancelOPECproductioncuts.• Despitefrackcrewshortagesandlimitstopressurepumpingequipment,2017wellcompletionrates
appearstrongintheBakken,EagleFordandPermianbasinplays.• EIAforecastisfortotalcrudeoilproductiontoincrease0.96mmb/din2017,another0.61mmb/din
2018(1.57mmb/dtotal2017-2018increase).• Mostofthedecreaseinbreak-evenpricesisbecauseofloweroil-fieldservicecostsandnotefficiency
andtechnology.
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MonthlyPermianWellCom
pletions
Bakken&EagleFordMonthlyW
ellCom
pletions
IncreasedTightOilWellCompletionsin2017
Permian
EagleFord
Bakken
Source:EIA&LabyrinthConsultingServices,Inc.
9.63
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9.74 10
.35
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WTIPrice($/Barrel)
MillionsofB
arrelsofCrudeOilPerD
ay
U.S.Output9.15mmb/dUp58kb/dInApril
April
2015
Source: EIASTEOMay2017&LabyrinthConsulting Services,Inc.
-1.06mmb/d
OilProduction(LHS)
WTIPrice(RHS)
Apr2
017
Dec2
017
+0.58mmb/d
Sept
2017
Dec2
018
+1.2mmb/dApr2017-Dec2018
ForecastIs10.35 mmb/dand$57/barrelbyDecember2018+0.96mmb/d in2017,+0.61in2018,+1.57total2017-18
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Norm
alize
dWTI&ProducerPrice
Index
TheCostofDrillingOilandGasWellsFell45%AfterTheOil-PriceCollapse;UnconventionalPlaysResultedIna4-foldIncreaseinDrillingCosts
Source:U.S.Federal ReserveBank,EIA&LabyrinthConsulting Services,Inc.
WTIPrice
OIl&GasWell DrillingProducer PriceIndex
Source:U.S.Federal ReserveBank,EIA&LabyrinthConsulting Services,Inc.
4-FoldIncreaseinO&GPPI
45%Decrease
Slide7LabyrinthConsultingServices,Inc. artberman.com
ComparativeInventoryIndicates$45/BarrelPriceforBrentandWTI
$0$5
$10$15$20$25$30$35$40$45$50$55$60$65$70$75$80$85$90$95$100$105$110$115$120$125$130$135$140
-200 -100 0 100 200 300 400 500
BrentPrice
(Apr2017$/Barre
l)
ComparativeInventory(mmbofliquids)
Aug2015- PresentData
May2015-July2015Data April
Data
Brentis~$7 over-valuedat$52.31
LastMonth$65
Itwill take12monthstoreduceinventories -130mmbtoreach$65
Brentontheyieldcurve
Source: EIASTEOMay2017&LabyrinthConsulting Services,Inc.
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WTIIs~$4/barrelOver-Valuedat$49.24
Comparative Inventory (Millionsof Barrels)
WTIPrice($/barrel)
ThisWeek$40
$55
Source:EIA&La
byrinthConsultingServices,Inc.
Mar-June 2015PriceRally
$45
LastWeek
• Supply,demandandinventoryindicate$45/barrel“right”priceforbothBrentandWTI.• Current$52Brentis~$7overvalued,$49WTIis~$4over-valued.• BothOECDandU.S.inventories~130mmb above5-yearaverage.• Atcurrentratesofinventorywithdrawal,itwilltake~12monthstoreducestocksenoughtosupport
$65/barrelprices.
Slide8LabyrinthConsultingServices,Inc. artberman.com
ComparativeInventoryIndicates$45/BarrelPriceforBrentandWTI
1.27
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8
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U.S.Stocks(bblliquids)
OECDStocks(bbliquids)
OECDInventoriesFlatin2017,Increasein2018U.S.InventoriesFallin2017,Increasein2018
U.S.Stocks(RHS)
Source: EIAMay2017STEO&LabyrinthConsulting Services,Inc.
OECDStocks(LHS)
• WorldproductionsurpluseshavebeenfallingforthelastyearbutEIAexpectsthesetostartincreasingasearlyasMay.
• Surplusesmaypersistthroughthemiddleof2018beforedecreasingagain.• ItsforecastisforBrentpricestoremainlessthan$60perbarrelthroughtheendof2018.• EIAforecastisforflatOECDinventoriesthrough2017,thenincreasein2018.• U.S.inventoriespredictedtofallin2018then,increasein2018.• MacquarieResearch
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Bren
tPric
e(Feb
ruary2
017Do
llarsPerBarrel)
WorldLiqu
idsP
rodu
ctionminusCon
sumption(M
illionsofBarrelsPe
rDay)
EIAForecastsProduction SurplusToIncrease2H2017-1H2018
Source: EIASTEOMay2017&LabyrinthConsulting Services,Inc.
ProductionSurplus(LHS)
BrentPrice(RHS)
IncreasingSurplus
DecreasingSurplusThru
1H2017
DecreasingSurplus2H2018
IncreasingSurplus2H2017-1H2018
ProdDeficit(LHS)
Slide9LabyrinthConsultingServices,Inc. artberman.com
$56 $5
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BrentPrice
($/Barrel)
MacquarieForecastsBrentPricesBelow$60Through2Q2019
Source:M
acquarie&La
byrinthConsultingServices,Inc.
MacquarieResearchPredictsSub-$60BrentThrough2Q2019
• RecentmodelingbyMacquarieResearchsupportsthisviewandpredictssub-$60Brentpricesthroughthesecondquarterof2019.
• AlthoughOPECcutsappeartobereal,MacquarieseesU.S.,RussiaandBrazilproductiongrowthasbearishdriversonprice.
• MaintainingOPECcutsbeyondtheendof2017willbedifficult.• RecenttalkofsellinghalfofU.S.strategicreservespotentiallyputsanadditional300millionbarrelsofoil
onanalreadyover-suppliedmarket.• Termstructureoffuturestripinbackwardationwithpriceslessthan$51/barreluntilAugust2021.
$45
$47
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$51
$53
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$57
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7 Sep-17
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NYMEXW
TIIPrice($/barrel)
WTIFuturesHaveBeenBackwardatedSinceApril2017
NOV302016
MAR242018
APR132017
May52017
MAY192017
25-May2017
Source:CME& LabyrinthConsultingServices,Inc.
Mar24
May5
May19May26
Slide10LabyrinthConsultingServices,Inc. artberman.com
MacquarieResearchPredictsSub-$60BrentThrough2Q2019$56 $5
6
$59
$59
$57
$56
$55
$56
$59
$60
$61
$63
$50
$52
$54
$56
$58
$60
$62
$64
Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419
BrentPrice
($/Barrel)
MacquarieForecastsBrentPricesBelow$60Through2Q2019
Source:M
acquarie&La
byrinthConsultingServices,Inc.
• RecentmodelingbyMacquarieResearchsupportsthisviewandpredictssub-$60Brentpricesthroughthesecondquarterof2019.
• AlthoughOPECcutsappeartobereal,MacquarieseesU.S.,RussiaandBrazilproductiongrowthasbearishdriversonprice--maintainingOPECcutsbeyondtheendof2017willbedifficult.
• RecenttalkofsellinghalfofU.S.strategicreservespotentiallyputsanadditional300millionbarrelsofoilonanalreadyover-suppliedmarket.
• Worldliquidsproductionwillincrease4millionbarrelsperdaybytheendof2018.• 62%ofincreasefromU.S.,28%fromOPEC—capitalmarkets¢ralbankskeytocapitalavailability.• Thatwillmeanrelativelylowoilprices,arequisitefortheglobaleconomytomuddleforward.
Slide11LabyrinthConsultingServices,Inc. artberman.com
Oil & Gas Company Return on Capital Employed
Oil & Gas Company Stock Performance
MajorPriceSpikeSometimeintheNext5Years
• Under-investmentwillensuretightersupplyinthefuture.• Reservereplacementata70-yearlow.• DespitegoodheadlinesaboutE&Pbreak-evenprices,ROCEisdeclining.• Oil&gascompanystockperformancewellbelowS&P500returns.
Slide12LabyrinthConsultingServices,Inc. artberman.com
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CPIA
djustedWTIPrice
s(Ja
nuary2017DollarsPe
rBarrel)
Oil Shocks-->
Massive E&PInvestment(North
Sea,Mexico,Siberia)
Over-Supply, DemandDestruction&PriceDeflation
Debt-FueledEconomicExpansion&Rapid
GrowthinChina&EastAsia
MassiveE&PInvestment(Shale, DeepWater,Heavy
Oil)
Over-Supply, DemandDestruction&Price
Deflation
Current$51OilPrice>40%HigherThanJan1986- Dec2004AverageinApril2017Dollars
Source:EIA, U.S.Bureau ofLaborStatistics &LabyrinthConsulting Services,Inc.
Avg1986-2004 $36/barrel Avg2005-2014$91/barrel
All PricesinConstant April 2017Dollars
Avg1974-1985 $71/barrel<$23/barrel
$50/barrel
1stBubble:1974-1980
2ndBubble:1999-2014
$48/barrel
OilMarketsinEarlyRecoveryFromOilPriceCollapse
• Secondmajorbubblesince1970.• Whenoilpricesgottoohighin2008,thesystemcrashed.Realestateandbankingaretheexplanation
butthecostofenergywasaconstantunderlaying thosefactors.• Whenoilpricesgottoohighagainfrom2011-2014,therewasnofinancialcollapsebuttherewasanoil-
pricecollapse.Itdoesnotfeelascataclysmicas2008forthoseoutsidetheoilindustrybecauseitmadeenergymoreaffordable.
• Oilpricesstill40%higherthanduringperiodofGDPgrowthin1980sand1990s.• Averagepriceofoilsince1950inconstant2016dollarswas$46/barrel.
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E
U.S.G
DP(2016$Trillions)
CPI-AdjustedW
TIPrice(2016$/Barrel)
GDPGenerallyIncreasesWhenOilPricesAreLow
andIsFlatWhenOilPricesAreHigh
OilPrice
GDP
GDP 5Yr
MovingAvg
Source:WorldBank,EIA,U.S.Bureau ofLabor Statistics&Labyrinth Consulting Services,Inc.
Avg1986-2004 $36/barrel Avg2005-2014
$91/barrel
GDP&Oil PricesInConstant2016Dollars
$48/
barrel
Avg1974-1985 $71/barrel<$23/
barrel
Slide13LabyrinthConsultingServices,Inc. artberman.com
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$8
$10
$12
$14
$16
$18
$20
$22
$24
$26
$28
$30
$32
$34
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S.Public,Corporate&
HouseholdDebt($Trillions)
FederalFundsEffectiveRate(Percent)
U.S.PublicandConsumerDebt&InterestRates
Reagan
Bush
Clinton
Bush
Obama
PublicDebt(RHS)
Source:U.S.Treasury,U.S.FederalReserveBankandLabyrinthConsultingServices,Inc.
InterestRates(LHS)
Carter
Nixon-FordKennedy-Johnson
Eisen-hower
AllDebt(RHS)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jan-00
Jun-00
Nov-00
Apr-01
Sep-01
Feb-02
Jul-0
2 Dec-02
May-03
Oct-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-0
7 Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-1
2 Dec-12
May-13
Oct-13
Mar-14
Aug-14
Jan-15
Jun-15
Nov-15
Apr-16
Sep-16
MillionsofBarrelsofCrudeO
ilPerDay
UnconventionalOilAccountsFor63%ofU.S.Production
Conventional
Unconventional
Source:Drilling Info,EIA,LabyrinthConsulting Services,Inc.&Crude OilPeak
U.S.DebtandTightOil
• U.S.hasbeenfundinggrowthwithdebtsincetheearly1970safterU.S.oilproductionpeaked.• Highinterestratesintheearly1980smadetheTreasurybondthereserveassetoftheworldandallowed
theU.S.toputgrowthonacreditcard.• Lowenergycoststhroughlate1990shelpedgrowth.• LowinterestratesanddollardevaluationaftertheFinancialCollapseproducedcapitalflowtotightoil
plays.• Now,tightoilismorethan50%ofU.S.oiloutputandincreasing.• BakkenandEagleFordplaysareprobablyinslowterminaldecline.• ThismeansthatthePermianbasinisthesolegrowtharea.• Furtherreasonforapricespikeinthecoming5years.