Navarik Market Update
July 20, 2017
After months of being on the defensive, OPEC was facing another bad week after Ecuador publicly announced they had willingly broken their production caps. Despite the fact that Ecuador amounts for a tiny amount in OPEC’s production volumes, any break in compliance at a time when most members could use any revenues they can get no matter the sticker price was a body blow for the cartel’s strategy to raise crude prices, since any number of larger producers might follow suit. Speculation that Saudi Arabia, the de facto leader of OPEC, planned on unilaterally reducing their own output by 1 million barrels a day only made matters worse. Not only would this amount to an admission the cuts were not working and other members had little stomach to cut further, it might in fact contribute to even less compliance; the game theory of the global oil markets suggests any number of others could quietly increase their output and distribute those 1 million barrels at the margins amongst themselves through an unspoken agreement that nevertheless remains within the group-wide target.
However, ironically, two pieces of news out of the US have supported OPEC’s hopes. First, for at least the second week in a row, the EIA report fed bullish sentiment as stocks declined in spite of increased crude production and high refinery throughput, suggesting that US domestic demand might be high enough to draw down product stocks faster than refiners can build them. Second, the Trump administration has hinted at sanctions on Venezuelan crude in response to the Maduro government’s ongoing roll-back of the rule of law and the ensuing political and economic crisis. While this may indeed hit Venezuela’s sole money-maker, it would also hamper the supply of feedstocks for those US refineries which are geared for the types of crude slates Venezuela produces. This would further tighten the US clean product market (a trend Navarik expects to continue based on our forecasted gasoline exports) and increase the competitive advantage of other OPEC countries that produce similar slates. Depending on the exact form of these sanctions, this could achieve an effect comparable to any Saudi unilateral cut.
Expect Saudi Arabia to hold off taking any drastic action, lest the US do it for them. Likewise, expect OPEC to take a soft stance on Ecuador (at least publicly) to bring them back into the fold and hold their agreement together for a few more months. They narrowly won this week; don’t expect them to rush into an own-goal.
Colin McCann is an Oil & Gas analyst with Navarik Corporation. The Navarik Data Products team analyzes Navarik's proprietary data sets and external sources to provide insights into the oil & gas shipping market. The resulting analysis enables physical and paper traders to see ship movements across the barrel before anyone else in the market.
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