The True Edge
A Navarik Market Update
UPDATE: Russian Energy Minister Alexander Novak has since commented that he believes Russia should indeed re-commit to the OPEC deal. In my opinion this is a tacit admission OPEC deal still hasn't worked, but also helps them as it keeps Russia in the fold.
Oil Bulls Rejoice? After years of OPEC-Shale standoff, both sides have reason to declare victory as we move into 2018. In Riyadh, they may have the strongest case. Brent broke above $70, Russia extended the output cut, and EIA data showed that US commercial crude stocks fell consistently throughout the year. In Houston, however, they can point to the fact that the output “cut” agreement’s definition has still allowed Russia to increase annual production by only cutting monthly average production levels against an atypically high monthly baseline. Bears also increasingly have game theory on their side, as the success of OPEC’s short game to push up prices has also made uneconomical wells in the US worth it. Bears took heart this week to news that the US added 15 rigs from the previous count to +280 from this time last year.
We previously wrote about how shale stands to benefit from OPEC’s attempts to raise prices thanks to the competitive nature of the industry in the United States (True Edge, 17 August 2017 and True Edge, 5 October 2017) and it appears this is coming true (even if we admittedly got the timing wrong.) A hidden positive of the delay for this effect to have actually started to kick in is that by now, Russia’s semi-competitive industry may have run out of patience with OPEC. Again, game theory enters the frame and Russia leaving would kill the unity among the OPEC members, although any additional Russian barrels hitting market could contribute to another glut developing in time.
In a sense, then, both OPEC and Houston can claim victory in the immediate term but with the balance going to OPEC. In the medium term however, the balance marginally reverts to Houston. Despite appearing almost over, the stand-off continues. Keep watching this space throughout 2018 as we dive into the stories that will make up this year’s tumbles and turns along the oil and refined product markets.
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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