WTI ended down $1.10 to $51.38/b after the late morning disclosure by OPEC on higher Dec oil production volumes. OPEC’ reported that its OPEC members estimate for Dec oil production was up ~60,000 b/d, instead of down 221,000 b/d as estimated by 3rd parties. It also means that OPEC will need to make bigger cuts to get to its targeted 32.5 million b/d effective Jan 1. OPEC compliance is the most important near term oil price factor. The higher Dec production and big variance to 3rd party estimates is likely to move more to the sidelines until the next OPEC MOMR comes out on Feb 13 showing what OPEC members saying they produced in Jan.
OPEC members reported Dec production was up ~60,000 b/d. OPEC released its Monthly Oil Market Report (MOMR) Jan 2017 this morning, which includes OPEC’s Dec 2016 oi production by country as provided by “Direct Communications” (ie. provided directly by OPEC members) and also by “Secondary Sources” (ie. Platts, EIA, etc). OPEC members Gabon, Libya, Iran and Qatar did not provide Dec production estimates. But the remaining 9 OPEC members (Algeria, Angola, Ecuador, Iraq, Kuwait, Nigeria, Saudi Arabia, UAE and Venezuela) estimated Dec oil production was ~60,000 b/d higher than Nov. Using Secondary Sources for Gabon and Libya (these countries do not report monthly data directly to OPEC) and Iran and Qatar being flat in Dec to their Nov estimates, then total OPEC production in Dec was 34.358 million b/d, up 83,000 b/d from 34.275 million b/d in Nov.
Secondary Sources estimate Dec production was down ~221,000 b/d. The OPEC MOMR Secondary Sources estimate for Dec production was 33.085 million b/d, which was down 221,000 b/d from 33.306 million b/d in Nov. The Secondary Sources is a combination of certain third party forecasts including Platts. Platts is an example of one of the Secondary Sources who estimated OPEC’s Dec oil production was down even more than the 221,000 b/d. On Jan 10, 2017, Platts estimated that OPEC’s Dec production was down 280,000 b/d vs Nov. [LINK]
It makes the challenge ~500,000 to 600,000 b/d tougher to get to target of 32.5 million b/d. The other negative of a 280,000 b/d swing difference to Secondary Sources is that it makes it tougher to get to the OPEC target cut levels of 32.5 million b/d. This will increase the spotlight on OPEC’s Jan oil production. The OPEC Nov 30 cut announcement [LINK] that it was reducing its production by around 1.2 million b/d “to bring its ceiling to 32.5 mb/d, effective 1st of January 2017”. At that time, OPEC also noted that its “reference” base levels to determine the approximate cuts were based on Oct 2016 levels as estimated by Secondary Sources. If we use our assumptions noted above, the total OPEC Dec production was 34.358 million b/d, compared to OPEC’s estimate of 33.685 million b/d for Oct. This is an increase of 493,000 b/d. But to get to 32.5 million b/d will require an additional 574,000 b/d more than the original approx. 1.173 million b/d cut. One of the problems is that Libya and Nigeria were exempt from making cuts and both have increased oil production from Oct to Dec.
More will move to the sidelines until Feb 13 to see what the OPEC produced in Jan. The 280,000 b/d variance between the OPEC Direct Communications and Secondary Sources estimates for Dec oil production means that more will wait until the next OPEC MOMR is released on Feb 13, 2017 for seeing how much OPEC cut in Jan, instead of relying on Secondary Sources estimates that start to come out earlier in Feb.
Especially since demand doesn’t grow in Q1 vs Q4. The importance of OPEC making its cuts on time is that oil demand doesn’t grow in Q1 relative to the preceding Q4. Normally, Q1 oil demand is down ~1 million b/d from the preceding Q4. This year is looking different. The EIA and the IEA both forecast Q1/17 demand to be flat to Q4/16. OPEC is more in line with prior year normal quarterly decline in oil demand. OPEC estimates Q1/17 oil demand to be 94.59 million b/d, which is 0.76 million b/d than its Q4/16 demand forecast of 95.35 million b/d.
Today’s disclosure by OPEC that its members increased oil production in Dec and there was a ~280,000 b/d variance to Secondary Sources estimates is likely to move more to the sidelines until OPEC’s next disclosure on Feb 13 and OPEC members telling what they produced in Jan. There is no question that the OPEC and non-OPEC cuts (and compliance thereto) are the most important near term factor driving oil prices. We continue to expect reasonable (but not perfect) compliance with the OPEC cuts, and that reasonable compliance will be supportive of oil prices going higher from current levels in 2017 and 2018.