Reuters: OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase

OPEC moved closer on Friday toward boosting oil output as its leader Saudi Arabia appeared to have persuaded arch-rival Iran to cooperate, after major consumers warned of a supply shortage. Saudi Arabia and non-OPEC Russia have said a production increase of about 1 million barrels per day (bpd) or around 1 percent of global supply had become a near-consensus proposal for the group and its allies. The Organization of the Petroleum Exporting Countries is gathering in Vienna amid calls from the United States, China and India to cool down the price of crude and prevent an oil deficit that would hurt the global economy.OPEC in theory needs the agreement of all members to clinch a deal but has in the past agreed production pacts without Iran, which has criticized the idea of raising supply as it faces export-crippling U.S. sanctions.
 

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Interests and money, Saudi Arabia and Iran at the same table... Few thousands miles away, in Yemen, they are in war...

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At the same time last year average price in Michigan was $2.26 per gallon. Today, $2.97... Nice step forward

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Maybe, this will imposes glut in the market which induces price drop in the market....

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So they admit they are manipulating the market with their output.  That is why the price of crude is high.  They decide how much to put out for the price...

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1 hour ago, ThunderBlade said:

OPEC moved closer on Friday toward boosting oil output as its leader Saudi Arabia appeared to have persuaded arch-rival Iran to cooperate, after major consumers warned of a supply shortage. Saudi Arabia and non-OPEC Russia have said a production increase of about 1 million barrels per day (bpd) or around 1 percent of global supply had become a near-consensus proposal for the group and its allies. The Organization of the Petroleum Exporting Countries is gathering in Vienna amid calls from the United States, China and India to cool down the price of crude and prevent an oil deficit that would hurt the global economy.OPEC in theory needs the agreement of all members to clinch a deal but has in the past agreed production pacts without Iran, which has criticized the idea of raising supply as it faces export-crippling U.S. sanctions.
 

That's not really what happened, though. I mean, both Reuters and OPEC are playing fast and loose with what happened here.

In Juli-speak, which can admittedly be a bit jarring, OPEC's Three-Card Monte is simply explained thusly:

for the last couple of months, OPEC has been complying 150% to the deal agreed on in Nov 2016. This means the whole group is UNDERproducing what they agreed upon by about 800,000 bpd. Now, they have agreed to increase production by "about" 1 million bpd (when they say "about" they mean 800,000 bpd). The only thing they have done is agreed to stick to the agreed upon quota. Nothing more, nothing less. So they will now be complying to the cuts by 100% instead of 150%. So the Nov 2016 deal stands. 

Iran won this round, because OPEC couldn't agree to do anything other than that without Iran, Iraq, and Venezuela being on board. 

They have done nothing new here. 

Carry on.

 

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From the OPEC press release :

The Conference analyzed oil market developments since it last met in Vienna at the end of November and reviewed the oil market outlook for the remainder of 2018.  The Conference noted that the oil market situation has further improved over the past six months, with the global economy remaining strong, oil demand relatively robust, albeit with some uncertainties, and with the market rebalancing evidently continuing. Moreover, the return of more stability and more optimism to the industry has been welcomed by all stakeholders.

Reaffirming OPEC’s continued commitment to stable markets, the mutual interest of producing nations, the efficient, economic, and secure supply to consumers, and a fair return on invested capital, and noting the overall improvement in market conditions and sentiment and the return of confidence and investment to the oil industry.

Recalling the 171st OPEC Conference resolution reached on 30 November 2016 for a production adjustment of 1.2 mb/d.

Noting that OPEC Member Countries have exceeded the required level of conformity that had reached 152% in May 2018.

Accordingly, the Conference hereby decided that countries will strive to adhere to the overall conformity level of OPEC-12, down to 100%, as of 1 July 2018 for the remaining duration of the above mentioned resolution and for the JMMC to monitor and report back to the President of the Conference.

 

The full text is available on OPEC website : http://www.opec.org/opec_web/en/press_room/5072.htm

 

The real question is how to get a 100% compliance with countries like Venezuela that can't reach the compliance level.

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What had happened with WTI oil price increased today? Is it because Japan will stop import Iran oil? Why?

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45 minutes ago, David S said:

What had happened with WTI oil price increased today? Is it because Japan will stop import Iran oil? Why?

I think prices rallied because OPEC didn't undo the deal, as some had feared, and the cartel didn't collapse, as some had feared. Other thoughts?

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8 hours ago, Rodent said:

I think prices rallied because OPEC didn't undo the deal, as some had feared, and the cartel didn't collapse, as some had feared. Other thoughts?

Julie, you overlook the impact of the oil traders in setting the daily price. One group of traders (let's call them the dominant group) gets the idea that they can sell contracts of oil for future delivery at a higher price than what they pay for it today on the spot market, so those guys start buying oil for future delivery and that combined effort starts driving up the today price.  The underling group thinks the inverse and so is selling them those contracts.   Oil will now march upwards a tad until the dominant group loses adherents and the drop-outs change sides. When the dominants lose their nerve then oil drops downwards. What motivates the dominant group? Two things: greed and fear. Right now, they are in greed mode.  We shall see how long they hold on.  Cheers.

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10 hours ago, Rodent said:

In Juli-speak, which can admittedly be a bit jarring, OPEC's Three-Card Monte is simply explained thusly:

 

Top-notch explanation!

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(edited)

Would someone please explain to this simple-minded observer how OPEC can actually accomplish a million barrels per day production increase? Since they do not control demand, they can only produce the oil requested by the buyers whose needs determine the demand. If the buyers continue to be satisfied in getting their oil supplies from current (and sufficient) sources, where does OPEC put the extra oil that they intend to produce?

Any answers based upon sound logic and arithmetic are welcome. Answers the presume that you can get something for nothing or, conversely, that you can produce ten gallons of oil into a five gallon bucket are not welcome.

Edited by William Edwards

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The new production will replace the current sources(inventory draws). I dont think it's more complicated than that? 

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(edited)

10 hours ago, Jon#2 said:

The new production will replace the current sources(inventory draws). I dont think it's more complicated than that? 

Tom, please tell me what you "liked" about this simplistic answer that is equivalent to "I looked in the back of the book and got the answer". He gave us no support for his assumption.

He said "I dont think it's more complicated than that?" Well, I think that it is much more complicated than that. I think what he is saying is that as long as inventory levels are constant we know what the producers will do. And, further, he knows, by some magic, what inventory levels will exist in the future. Even that element of his assumption is not simple to assess.

In order to bring us up to speed on the supporting data, Jon, please provide us with the data that show current inventory activity. I am impressed that you might have such since, actually, it is impossible to accurately know inventories on a current basis. We get reports on something like 60% of inventories with a three month delay. Some we never get. We extrapolate from the reports that we get to get a "Total Inventories" number. Therefore I am puzzled as to where the producers get fed the inventory numbers they need so that they will know how much to produce.

Now, presuming that you surprise me and give me the data that nobody else has, can you provide me, as well, the historical data that demonstrate your assumption that knowing the inventory change is sufficient for you to know the supply composition? Although I have studied the data extensively I cannot find that such a relationship exists. Please show me otherwise.

We appreciate your contribution if you back up your assessment with substantiation. 

Now to the important part of your answer which states that the question is not complicated. If current suppliers step aside to allow OPEC to add a million barrels a day of their production, what authority allocates the cut backs necessary for the producers who must retreat from the market? Since I know of no worldwide authority that controls producers' activities, may I assume the this shut in is dictated by pricing action? That seems reasonable. But at what price level must OPEC be willing to sell to force non-OPEC producers to cut back? You probably do not know that number, but we can probably agree that it will be very low.

In my mind, a substantial global price drop is a complication of major proportions.

Edited by William Edwards

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(edited)

49 minutes ago, William Edwards said:

 

Now to the important part of your answer which states that the question is not complicated. If current suppliers step aside to allow OPEC to add a million barrels a day of their production, what authority allocates the cut backs necessary for the producers who must retreat from the market? Since I know of no worldwide authority that controls producers' activities, may I assume the this shut in is dictated by pricing action? That seems reasonable. But at what price level must OPEC be willing to sell to force non-OPEC producers to cut back? You probably do not know that number, but we can probably agree that it will be very low.

In my mind, a substantial global price drop is a complication of major proportions.

William, I suggest that what you overlook is that there is no "step-aside" and that other oil ends up not being shut-in.  

You are looking at the volume of oil consumed as being a constant.  There is, however, the possibility that as more production hits, and prices drop to clear the market, the retail consumers end up consuming more!  And how is this, given that oil  (really, gasoline and heating oil) is an inelastic good? And I suggest that, even when an inelastic good, there is still "some" increase in consumption with a decrease in price. 

Let us assume that retail gasoline drops by fifty cents a gallon.  Now the individual consumer may respond to taking two individual trips each six miles to the grocery store, for purposes of instant gratification, rather than waiting conscientiously and doing one trip. Hey, why not?  You want that box of crackers or that container of ice cream and you want it now!  Deferring gratification at a time of low prices is not inherent in human nature - at least, not in the West, and assuredly not in America.  [And you get a little bit of the reverse when prices climb, with consumers of heating oil dropping their thermostats or switching over to wood-pellet stoves, to consume less oil]. 

So what happens?  The producers pump that extra million barrels into the global system.  And millions of users respond by using "just a little bit more."  So no other producer gets shut out, as long as the  price drop of that inelastic good is sufficient to stimulate just that little bit of extra demand   spread out over millions of retail buyers.  Just a thought, anyway. 

Edited by Jan van Eck

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1 hour ago, Jan van Eck said:

William, I suggest that what you overlook is that there is no "step-aside" and that other oil ends up not being shut-in.  

You are looking at the volume of oil consumed as being a constant.  There is, however, the possibility that as more production hits, and prices drop to clear the market, the retail consumers end up consuming more!  And how is this, given that oil  (really, gasoline and heating oil) is an inelastic good? And I suggest that, even when an inelastic good, there is still "some" increase in consumption with a decrease in price. 

Let us assume that retail gasoline drops by fifty cents a gallon.  Now the individual consumer may respond to taking two individual trips each six miles to the grocery store, for purposes of instant gratification, rather than waiting conscientiously and doing one trip. Hey, why not?  You want that box of crackers or that container of ice cream and you want it now!  Deferring gratification at a time of low prices is not inherent in human nature - at least, not in the West, and assuredly not in America.  [And you get a little bit of the reverse when prices climb, with consumers of heating oil dropping their thermostats or switching over to wood-pellet stoves, to consume less oil]. 

So what happens?  The producers pump that extra million barrels into the global system.  And millions of users respond by using "just a little bit more."  So no other producer gets shut out, as long as the  price drop of that inelastic good is sufficient to stimulate just that little bit of extra demand   spread out over millions of retail buyers.  Just a thought, anyway. 

I agree with what you say, directionally, but it appears that we have different quantitative ideas in our heads, Jan. First, a fifty cents per gallon gasoline price drop, equivalent to $21/B crude price drop, is definitely significant to producers, but not so much to consumers. Your example, in itself, seems to agree with my expectation for a big price drop, but history doesn't support the large consumer reactions to a 50¢ price change. Did you even notice that the price increased by a similar amount three months ago and people have kept driving? The reverse situation also occurs. Demand is not at all directly proportional to price. For demand to increase a million barrels a day, I suspect that the price would have to be cut in half, and even then it might take a year or two for that impact to be realized in the demand figures.

OPEC is not content to wait a year or two to increase their production, so I suspect that this mechanism will not fly. The realistic and practical answer is that if OPEC wants to immediately increase production they have to push somebody else out of the supply system. Price is usually the tool for that. A resumption of the OPEC/non-OPEC price war seems to be in our future.

I might add that the price cut that OPEC will implement to achieve the cutback in non-OPEC production is not a finely-tuned tool. It is akin to trimming your fingernails with an axe. When the traders smell blood in the water you can be sure that the response that should be $10/B will be $50/B.

Just something to think about.

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It would be great for everyone to stabilize prices at the current $75 Brent and $65 Wti to allow for planning and development of new supplies to make prices predictable going forward. Off shore development needs price stability to plan for large investments. In some ways a higher stable price will allow alternative energy products to develop as well. When traders move the price like a ping pong ball up and down it hurts critical planning. 

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William you ask which crude the 600kbd will be displacing but the rationale for the increase has been stated quite clearly. The point of the increase to prevent a large price spike during Q3 (when demand rises) which will be happening while Venezuela's production continues to fall, Iran sanctions start hitting, and Permian pipelines will be full.

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Iran and Saudi Arabia are still disagreeing on the OPEC agreement :

 

Saudi Energy Minister Khalid al-Falih said this implied an indirect reallocation of extra production from countries unable to produce more oil to those, such as his own and the other Gulf OPEC members, that are able to do so.

But Iran’s OPEC governor, Hossein Kazempour Ardebili, told Reuters that no reallocation was agreed at Saturday’s joint OPEC and non-OPEC meeting or the OPEC-only talks a day earlier. “There is no such thing,” Kazempour said. “Some people may do, but they are in breach of the agreement.”

https://uk.reuters.com/article/uk-oil-opec-iran-interview/iran-sees-little-extra-oil-if-opec-partners-stick-to-deal-idUKKBN1JJ0WG

The compromise is lacking clarity and each side has is own interpretation.

They approved something close to what i suggested last week (sticking to the previouscut  and reducing to 100% compliance) but without the reallocation mechanism.

 

 

 

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12 hours ago, William Edwards said:

Tom, please tell me what you "liked" about this simplistic answer that is equivalent to "I looked in the back of the book and got the answer". He gave us no support for his assumption.

He said "I dont think it's more complicated than that?" Well, I think that it is much more complicated than that. I think what he is saying is that as long as inventory levels are constant we know what the producers will do. And, further, he knows, by some magic, what inventory levels will exist in the future. Even that element of his assumption is not simple to assess.

In order to bring us up to speed on the supporting data, Jon, please provide us with the data that show current inventory activity. I am impressed that you might have such since, actually, it is impossible to accurately know inventories on a current basis. We get reports on something like 60% of inventories with a three month delay. Some we never get. We extrapolate from the reports that we get to get a "Total Inventories" number. Therefore I am puzzled as to where the producers get fed the inventory numbers they need so that they will know how much to produce.

Now, presuming that you surprise me and give me the data that nobody else has, can you provide me, as well, the historical data that demonstrate your assumption that knowing the inventory change is sufficient for you to know the supply composition? Although I have studied the data extensively I cannot find that such a relationship exists. Please show me otherwise.

We appreciate your contribution if you back up your assessment with substantiation. 

Now to the important part of your answer which states that the question is not complicated. If current suppliers step aside to allow OPEC to add a million barrels a day of their production, what authority allocates the cut backs necessary for the producers who must retreat from the market? Since I know of no worldwide authority that controls producers' activities, may I assume the this shut in is dictated by pricing action? That seems reasonable. But at what price level must OPEC be willing to sell to force non-OPEC producers to cut back? You probably do not know that number, but we can probably agree that it will be very low.

In my mind, a substantial global price drop is a complication of major proportions.

Well in my opinion the answer to your question, in the bigger picture, really is that simplistic.

Yeah OPEC can't be sure what the current and future inventory(supply/demand) balance looks like, they can only make assumptions. But i think they have a lot better data then anyone of us. In the case it turns out that there is already enough supply from existing production, my guess is that OPEC would dial down their production increase. The battle for market share(the fight wasn't specifically aimed at shale) has already been fought, now it is time to reap the rewards.  

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On 6/24/2018 at 12:11 AM, William Edwards said:

Tom, please tell me what you "liked" about this simplistic answer that is equivalent to "I looked in the back of the book and got the answer". He gave us no support for his assumption.

William, I already had similar thoughts to John#2 comment before I even saw his comment.

I'm responding to your question above before I read the long back and forth discussion between you and Jan, so my thinking at the time that I "liked" the comment by John#2 doesn't get changed by the newer info that will likely result after I read the discussion between you and Jan.  (By the way, I really enjoy reading the back and forth discussions between you and Jan; good stuff.)

Anyway, back to my original line of thinking after reading your earlier comment:

On 6/23/2018 at 11:50 AM, William Edwards said:

Would someone please explain to this simple-minded observer how OPEC can actually accomplish a million barrels per day production increase? Since they do not control demand, they can only produce the oil requested by the buyers whose needs determine the demand. If the buyers continue to be satisfied in getting their oil supplies from current (and sufficient) sources, where does OPEC put the extra oil that they intend to produce?

Any answers based upon sound logic and arithmetic are welcome. Answers the presume that you can get something for nothing or, conversely, that you can produce ten gallons of oil into a five gallon bucket are not welcome.

I don't have arithmatic to offer.  My general logic is this:

Over the last 18 months or so, OPEC + Russia managed to reduce the global glut of crude oil produced, down to manageable levels.  Complicating the supply issue is the renewed sanctions against Iran oil, and Venezuela's oil production going into a serious tailspin.

The global produced crude oil glut was successfully reigned in, to the point that there seems to be a danger in the near future (next year?) of insufficient or over-tightened global supply.

If I trot out my See Saw analogy, the under-supply side of the Supply See Saw seems to be weighing more now than the over-supply (glut) side of the Supply See Saw.

OPEC + Russia increasing 500k bpd (that was my guestimate last week for an increase) would tend to move the Supply See Saw more toward a relative balance between over-production and under-production.

So... the comment by John#2 generally agreed with my thinking.

My logic above won't win any awards, but I'm answering your specific question as to why I liked the comment by John#2.

/ Side note: please note, I tend to "upvote" or "like" not only comments that I agree with, but as a moderator, I also tend to upvote or like comments that I do not agree with, but which are well thought out or compellingly argued.  My favorite comments are those that make me stop and think and reconsider my own views.  Even more so if someone can change my mind via the logic in their comment.

Anyway, after I submit my reply here, I'll scroll back up and read the lengthy back and forth between Jan and you.

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