The OPEC ministers have packed-up and left with no real surprises as the cartel maintained its daily output at 30 million barrels per day (bpd). But in the absence of any real surprises from OPEC, the downward bias in the direction of leading oil futures benchmarks is getting stronger, given the perceived oversupply and a flat, if not dicey, macroeconomic climate. The Brent forward month futures contract plummeted to nearly US$100, seeing a near 2.5% dip from last week (click on graph to enlarge). Given that the trading community had already factored in the outcome of the 163rd OPEC meeting even before it concluded, most appear to be waiting to see whether the US Federal Reserve continues with its monetary stimulus programme. Even if it does so, given the macroeconomic permutations, it is not worth holding your breath for a ‘crude’ bounceback.
Far from cutting production, there seem to be murmurs and concern in the hawkish camps of Iran and Venezuela about constantly improving production levels in Iraq. Abdul Kareem al-Luaibi, Iraq’s oil minister, confirmed at a media scrum in Vienna that the country plans to start production at two of its largest oilfields within “a matter of weeks.”
Production commencement at Majnoon (which is imminent) and Gharraf (due in July), followed by a third facility at West Qurna-2 (due by December if not earlier) would lift Iraqi capacity by 400,000 bpd according to al-Luaibi. The country’s current output is about 3.125 million bpd. The additional capacity would bolster its second position, behind Saudi Arabia, in the OPEC output league table.
The Iraqis have a monetary incentive to produce more of the crude stuff. Sadly for OPEC, it will come at a time the cartel does not need it. Instead of adherence, there will be further flouting of the recently agreed upon quota by some members. Iraq is not yet even included in the quota (and may not be until late into 2014).
Non-OPEC supply is seeing the ranks of the usual suspects Russia and Norway, joined ever more meaningfully by Brazil, Kazakhstan, Canada and not to mention (and how can you not mention) – the US, courtesy of its shale supplies and more efficient extraction techniques at Texan conventional plays. So a downward bias will prevail – for now.
In fact, Morgan Stanley did not even wait for the OPEC meeting to end before downgrading oil services firms, mostly European ones, based on the conjecture that IOCs as well as NOCs (several of whom hail from OPEC jurisdictions) would allocate relatively lower capex towards E&P.
Robert Pulleyn, analyst at Morgan Stanley, wrote and the Oilholic quotes: “With oil prices the key determinant of industry operating cash flow, and given our expectation for an increasingly range bound price environment, we expect industry-operating-cash-flow growth to fall from 14% compound annual growth rate (since 2003) to about 3% in the future. We expect capex growth to fall to around 5% a year to 2020, compared to 18% compound annual growth rate since 2003.”
Of the five it downgraded on Thursday – viz. Vallourec, SBM Offshore, CGG Veritas, TGS-NOPEC and Subsea 7 – only the latter avoided a dip in share price following the news. However, Morgan Stanley upgraded John Wood Group, saying it is better positioned to withstand a lower growth outlook for industry spending.
As for the price of the crude stuff itself, many analysts didn’t wait for OPEC either with Commerzbank, Société Générale and Bank of America Merrill Lynch (BoAML) all sounding bearish on Brent. BoAML cut its Brent crude price forecasts to $103 per barrel from $111 for the second half of 2013, citing lower global oil demand, rising supplies and higher inventories. The bank expects the general weakness to persist next year and reduced its 2014 average Brent price outlook from $112 to $105 per barrel. So there you have it and that’s all from Vienna folks!
Since it’s time to say Auf Wiedersehen, the Oilholic leaves you with a view of the city’s Irrgarten and Labyrinth at the Schönbrunn Palace grounds (see right). Once intended for the amusement of Austro-Hungarian royalty and their guests, this amazing maze is now for the public’s amusement.
While visitors to this wonderful place are getting lost in a maze for fun, OPEC ministers going round in circles over a key appointment to the post of Secretary General is hardly entertaining. At such a challenging time for it, the 12-member oil exporters’ club could do with a bit of unity. Yet it cannot even unite behind a single candidate for the post – something which has been dragging on for a year – as rivals Iran and Saudi Arabia continue to hold out for their chosen candidate for the post. Furthermore, it’s taken an ugly sectarian tone along Shia and Sunni lines.
Worryingly, this time around, neither the Saudis nor the Iraqis are in any mood for a compromise as the rest of the 10 members wander around in a maze feeling dazed about shale, internal rivalries, self interest and plain old fashioned market anxieties. The Oilholic maintains it’s premature to suggest that a rise in unconventional production is making OPEC irrelevant, but its members are unwittingly trying really hard to do just that! Keep reading, keep it ‘crude’!
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© Gaurav Sharma 2013. Graph: World crude oil futures benchmarks to May 25, 2013 © Société Générale. Photo: Irrgarten & Labyrinth, Schönbrunn Palace, Vienna, Austria © Gaurav Sharma 2013.