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The Week Ahead: OPEC Meeting On Wednesday To Bring Price Volatility



• Crude oil inventories decreased by 1.3 MMBbl last week as reported by the EIA. The gasoline and distillate inventories increased 2.3 MMBbl and 0.3 MMBbl respectively. The unexpected crude oil withdrawal was due to lower imports (down 845 MBbl/d) and slightly higher refinery runs (up 271 MBbl/d). The most important number to keep an eye on, total petroleum inventories, posted an insignificant decline of 0.1 MMBbl. The report was neutral, as the bullish decline in crude oil stocks was offset by the bearish, higher than expected, growth in gasoline inventories. Reporting early due to the Thanksgiving holiday this week, Baker Hughes reported on Wednesday that five rigs had been added in the US, extending the rig count gains.

• The markets chose to focus on OPEC related news and largely ignore any other fundamental news this week:
1. The market began the week optimistic about the prospects of an OPEC cut. The cartel was believed to be close to agreeing on the details of a cut of 4-4.5% from current output levels. Libya and Nigeria were going to be kept exempt and Iran was going to be allowed to cap production at current levels.
2. The market started giving back the gains on Tuesday as the prospects of Iran and Iraq agreeing to cap or cut production was placed under scrutiny. Iran is still targeting higher production levels (4-4.2 MMBbl/d) since the sanctions have been lifted and Iraq has made it clear that they want to remain exempt, as they need the revenue to fight ISIS.
3. Prices were down 4% on thin trade Friday, as Saudi Arabia pulled out of a Monday meeting with Russia regarding non-OPEC involvement in the cut. Saudi Arabia believes that OPEC members should reach a consensus regarding the cut before meeting with non-OPEC members. Russia was largely expected to propose to cap its production at current levels. The announcement once more highlighted that the cut (or the mere credibility of its enforcement) is still uncertain.
4. News also emerged that Saudi Arabia is planning to increase exports to Asia in January. The news comes fresh on the heels of data showing Russia has overtaken Saudi Arabia as the top exporter to China in October. It is unclear how Saudi Arabia would increase exports to Asia while also bearing the brunt of the production cut.

• Crude oil prices are going to be dictated by OPEC this week. The market still expects OPEC to announce a cut after the meeting on Wednesday. The lack of a cut would significantly damage OPEC’s reputation. However, the clear indication from Saudi Arabia that no consensus has yet been reached among cartel members may be an attempt by them to save face in the event of a non-agreement. In the event of a cut announcement, the market will pay special attention to the details. Without a credible plan to reduce production, price gains from an announcement may be limited. It is also worth noting that any announced cuts would have little effect on production volumes until February, as exports are usually scheduled two months out. Drilinginfo expects prices to be volatile leading up to and in the immediate aftermath of the OPEC meeting. Additionally, traders may close open positions prior to the risky Wednesday announcement.


• Total natural gas supply increased week-on-week by 200 MMcf/d driven by higher production from the Rockies, mainly a recovery from the prior week lows seen in the region. Canadian imports were unchanged again last week.

• Demand for natural gas was the key player last week as some winter weather finally materialized. Total demand increased by over 9 Bcf/d last week. Res/Com drove the gains while Power, LNG and Mexican exports reported some losses. Weather forecasts for the upcoming week have increased to above normal and are expected to push demand down next week.

• The first withdrawal of the season was reported by EIA last Wednesday, which came in a week earlier than expected. A 2 Bcf withdrawal was reported for the week ending Nov. 18 compared to a range of forecasts between -1 to +15. The market is currently anticipating a withdrawal in the 40’s Bcf on Thursday’s report, which is about 15% higher than last year.

• The bullish storage report combined with the cooler weather last week had prices trading higher over 20 cents week-on-week. Although the storage report is expected to show a withdrawal larger than last year’s, the risk this week for gas prices is to the downside as temperatures are forecast to be warmer and could push demand lower.

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