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

Update this morning from Nick Cunninhgam.  The 4 reasons from the article are summarized below (more details in the link)

Why OPEC+ Needed To Add More Oil

Still, there are several reasons why OPEC+ feels compelled to increase production.

●  First, the oil market is already in a supply deficit, and in fact, it may have been experiencing a deficit for four straight quarters

●  A second reason OPEC+ needed to increase supply is because demand continues to grow at a strong pace.

-  On top of that, demand rises seasonally in the summer months.

●  Third, the supply disruptions are multiplying, and each individual flashpoint puts a significant chunk of oil at risk.

●  A fourth reason why more OPEC+ production is needed is because it looks increasingly likely that U.S. shale will undershoot production estimates over the next year. 

  • Upvote 1

Share this post


Link to post
Share on other sites

(edited)

38 minutes ago, Tom Kirkman said:

Update this morning from Nick Cunninhgam.  The 4 reasons from the article are summarized below (more details in the link)

Why OPEC+ Needed To Add More Oil

Still, there are several reasons why OPEC+ feels compelled to increase production.

●  First, the oil market is already in a supply deficit, and in fact, it may have been experiencing a deficit for four straight quarters

●  A second reason OPEC+ needed to increase supply is because demand continues to grow at a strong pace.

-  On top of that, demand rises seasonally in the summer months.

●  Third, the supply disruptions are multiplying, and each individual flashpoint puts a significant chunk of oil at risk.

●  A fourth reason why more OPEC+ production is needed is because it looks increasingly likely that U.S. shale will undershoot production estimates over the next year. 

Thanks, Tom. Let me tell you why I disagree. Basically, I view the idea that, suddenly, the supply/demand balance or its sister, inventory levels, simplistically dictate oil prices goes counter to 150 years of history, as well as logic. The fact that inventories rose while prices dropped between 2014 and 2016 is completely ignored. Instead all the attention is focussed on the fact that inventories fell across the next two years. While it is true that the drop in inventories coincided with the "cutback" by OPEC ( more accurately described as OPEC withdrawing from competition with non-OPEC suppliers), it also coincided with the change in calendar spreads going from $10/B in favor of holding oil to a negative $/B difference. Now which do you suppose was the real reason that companies changed their willingness to hold oil for later sales (inventories)? My guess is that it was the financial advantage of storing oil, hedging the sale on the futures market, and delivering the oil a year or two later. When those economic conditions changed, inventories were sold off.

One might further note that there has been no evidence in the real oil market of any scarcity of supplies while OPEC was restrained. This leads to the possibility that the growth in non-OPEC production was comfortably placed into the demand growth category. The system did not need the OPEC barrels. It is likely that OPEC would have been forced to cut back even without claiming compliance. The demand was not there.  This raises the further question as to whether the forthcoming demand growth will continue to be comfortably supplied by non-OPEC supply growth. IF non-OPEC comfortably continues to fulfill the needs of the consumer, then the OPEC increase has no home, unless OPEC gets price competitive to the degree necessary to push non-OPEC out of the supply business. This foretells lower prices.

There you have my reasoning. Please comment.

Edited by William Edwards
  • Like 1
  • Upvote 2

Share this post


Link to post
Share on other sites

3 hours ago, Tom Kirkman said:

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:

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 insuffiecient 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.

For convenience I am repeating the response that I posted on another discussion, "Reuters: OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase"

I view the idea that, suddenly, the supply/demand balance or its sister, inventory levels, simplistically dictate oil prices goes counter to 150 years of history, as well as logic. The fact that inventories rose while prices dropped between 2014 and 2016 is completely ignored. Instead all the attention is focussed on the fact that inventories fell across the next two years. While it is true that the drop in inventories coincided with the "cutback" by OPEC ( more accurately described as OPEC withdrawing from competition with non-OPEC suppliers), it also coincided with the change in calendar spreads going from $10/B in favor of holding oil to a negative $/B difference. Now which do you suppose was the real reason that companies changed their willingness to hold oil for later sales (inventories)? My guess is that it was the financial advantage of storing oil, hedging the sale on the futures market, and delivering the oil a year or two later. When those economic conditions changed, inventories were sold off.

One might further note that there has been no evidence in the real oil market of any scarcity of supplies while OPEC was restrained. This leads to the possibility that the growth in non-OPEC production was comfortably placed into the demand growth category. The system did not need the OPEC barrels. It is likely that OPEC would have been forced to cut back even without claiming compliance. The demand was not there.  This raises the further question as to whether the forthcoming demand growth will continue to be comfortably supplied by non-OPEC supply growth. IF non-OPEC comfortably continues to fulfill the needs of the consumer, then the OPEC increase has no home, unless OPEC gets price competitive to the degree necessary to push non-OPEC out of the supply business. This foretells lower prices.

Share this post


Link to post
Share on other sites

1 hour ago, William Edwards said:

 This raises the further question as to whether the forthcoming demand growth will continue to be comfortably supplied by non-OPEC supply growth. IF non-OPEC comfortably continues to fulfill the needs of the consumer, then the OPEC increase has no home, unless OPEC gets price competitive to the degree necessary to push non-OPEC out of the supply business. This foretells lower prices.

There you have my reasoning. Please comment.

To no surprise, your reasoning is impeccable. 

  • Like 2

Share this post


Link to post
Share on other sites

On 6/23/2018 at 3:02 PM, William Edwards said:

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.

I would love to see a chart showing US retail gasoline sales vs price. I suspect that the correlation between the two exists on some level, but that the relationship, like Bella and Edward, is extremely complicated, because gasoline demand is likely swayed by a myriad of other things as well. 

On 6/20/2018 at 8:47 PM, Tom Kirkman said:

 

  • Like 1

Share this post


Link to post
Share on other sites

8 minutes ago, Jan van Eck said:

To no surprise, your reasoning is impeccable. 

Thanks, Jan.

Share this post


Link to post
Share on other sites

3 minutes ago, Rodent said:

I would love to see a chart showing US retail gasoline sales vs price. I suspect that the correlation between the two exists on some level, but that the relationship, like Bella and Edward, is extremely complicated, because gasoline demand is likely swayed by a myriad of other things as well. 

The EIA publishes the raw data if you are willing to go to the trouble to chart it. What is shows is that for the US (the only location that has demand data of the required quality), you can see a correlation of demand growth, not demand, versus price changes. Second order effects are visible. First order are not. The data show about a one and a half year time lag for a modest change in demand growth. If I can readily pull up my chart I will post it.

  • Upvote 1

Share this post


Link to post
Share on other sites

Just now, William Edwards said:

The EIA publishes the raw data if you are willing to go to the trouble to chart it. What is shows is that for the US (the only location that has demand data of the required quality), you can see a correlation of demand growth, not demand, versus price changes. Second order effects are visible. First order are not. The data show about a one and a half year time lag for a modest change in demand growth. If I can readily pull up my chart I will post it.

re: demand growth, that makes sense I guess. If you have a chart handy that'd be awesome; if not I'll look to EIA. 

Share this post


Link to post
Share on other sites

4 minutes ago, Rodent said:

re: demand growth, that makes sense I guess. If you have a chart handy that'd be awesome; if not I'll look to EIA. 

Hey! Lucky me! I found it.

 

Price vs Demand Growth.png

  • Like 1

Share this post


Link to post
Share on other sites

 

3 hours ago, William Edwards said:

Thanks, Tom. Let me tell you why I disagree. Basically, I view the idea that, suddenly, the supply/demand balance or its sister, inventory levels, simplistically dictate oil prices goes counter to 150 years of history, as well as logic. The fact that inventories rose while prices dropped between 2014 and 2016 is completely ignored. Instead all the attention is focussed on the fact that inventories fell across the next two years. While it is true that the drop in inventories coincided with the "cutback" by OPEC ( more accurately described as OPEC withdrawing from competition with non-OPEC suppliers), it also coincided with the change in calendar spreads going from $10/B in favor of holding oil to a negative $/B difference. Now which do you suppose was the real reason that companies changed their willingness to hold oil for later sales (inventories)? My guess is that it was the financial advantage of storing oil, hedging the sale on the futures market, and delivering the oil a year or two later. When those economic conditions changed, inventories were sold off.

One might further note that there has been no evidence in the real oil market of any scarcity of supplies while OPEC was restrained. This leads to the possibility that the growth in non-OPEC production was comfortably placed into the demand growth category. The system did not need the OPEC barrels. It is likely that OPEC would have been forced to cut back even without claiming compliance. The demand was not there.  This raises the further question as to whether the forthcoming demand growth will continue to be comfortably supplied by non-OPEC supply growth. IF non-OPEC comfortably continues to fulfill the needs of the consumer, then the OPEC increase has no home, unless OPEC gets price competitive to the degree necessary to push non-OPEC out of the supply business. This foretells lower prices.

There you have my reasoning. Please comment.

William, we seem to be going a bit off track here.  I don't recall bringing price anywhere into this particular conversation.  But since you brought it up, I'll touch on it shortly, in a roundabout way.

Anyway, my comment is... your reasoning is sound, in my opinion.  And you have more years of experience than I do.

On the other hand, I have some different viewpoints than you do on the supply issues.

Basically, global oil inventories have been tightening, primarily due to reduced production by R+OPEC (Russia + OPEC) over the last year or so.

Logically, it would seem wise to reduce the oil production restrictions in order to prevent an undersupply of production in the near future.  And despite the many flaws in OPEC, a relative balance is actually one of the basic premises of OPEC.

This concept of relative balance is something that I actually agree with OPEC on (although OPEC is admittedly more biased for higher prices than I am).

Below is page 59 of the OPEC Children's Book.  Notice the concept of a relative balance.  OPEC indicates they want to coordinate a relative balance both of

● oil production (avoiding either over-producing or under-producing oil)

oil price (avoiding prices that are either too high or too low)

==============================

Keeping the market supplied

Throughout its 50-year history, OPEC has seen periods of both extremely high and low oil prices. Each time OPEC has tried to respond in an appropriate manner.

OPEC does this by coordinating the oil policies of its Member Countries. 

If demand suddenly grows and supplies fall short, OPEC can increase its oil production in order to keep the market well supplied. On the other hand, if demand suddenly falls and supplies grow, OPEC can slow down production in order to help maintain a balance in the market. 

OPEC’s actions at critical times have demonstrated the Organization’s ability to keep the oil market well-supplied during different kinds of unexpected events, such as wars or natural disasters. 

Stabilizing oil markets

One of the most important parts of OPEC’s mission is making sure that the oil markets remain stable. One way that OPEC tries to do this is by working to avoid price extremes (when oil prices are too low or too high). 

Avoiding price extremes—and sudden changes in prices—is important for producers and consumers. When oil prices are too high or too low, problems can be generated for the global economy.

For example, with extremely high oil prices, it costs more to do things—like run a car, operate a machine or make products like plastics.

But extremely low oil prices also cause problems. If the price of crude oil is too low, then it doesn’t make sense to spend money trying to find more oil. Investments in projects may then fall.

==============================

 

Note that I view OPEC's words above more as rhetoric rather than as actual practice, but the general concept of aiming toward a relative balance is sound.

My version of the concept of aiming for a relative balance is the See Saw.  I've used the analogy of an Oil Price See Saw and also an Oil Supply See Saw.  A relative balance on the See Saw is preferable to either too much or too little production, and also a relative balance is preferable to either too high or too low of oil prices.

Currently, my own prefence of a relative balance of oil prices are in the range of $65.  Saudi Arabia currently appears to favor $80 as their own preference of a relative balance.

In 2015 to 2017, my own preference for a relative balance of oil prices was around $50, and definitely no more than $60.

 

One last note, even though the OPEC Childrens Book is a great resource to explain the very basic fundamentals of oil exploration, production, refining and transportation in its first 4 chapters, some of the later chapters where it implies the self-serving politics that International Oil Companies are the bad guys in black hats, and OPEC was formed as the good guys in white hats, to rescue the world, is amusing.  That amusing political ideology is one reason why I don't feel bad at all to gently poke fun of OPEC's internal squabbles in my thread OPEC soap opera daily update.

 

P.S. it's great to have the freedom to write long comments here.  LinkedIn's character limit can be exceedingly frustrating.

Share this post


Link to post
Share on other sites

On 22 June 2018 at 3:48 PM, Pavel said:

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

The US and Russia are at a near war situation in Syria, sanction here and there but they often sit on the same table and talk, so Iran-Saudi reapprochment shouldn't be news

  • Like 1

Share this post


Link to post
Share on other sites

7 hours ago, Tom Kirkman said:

 

William, we seem to be going a bit off track here.  I don't recall bringing price anywhere into this particular conversation.  But since you brought it up, I'll touch on it shortly, in a roundabout way.

Anyway, my comment is... your reasoning is sound, in my opinion.  And you have more years of experience than I do.

On the other hand, I have some different viewpoints than you do on the supply issues.

Basically, global oil inventories have been tightening, primarily due to reduced production by R+OPEC (Russia + OPEC) over the last year or so.

Logically, it would seem wise to reduce the oil production restrictions in order to prevent an undersupply of production in the near future.  And despite the many flaws in OPEC, a relative balance is actually one of the basic premises of OPEC.

This concept of relative balance is something that I actually agree with OPEC on (although OPEC is admittedly more biased for higher prices than I am).

Below is page 59 of the OPEC Children's Book.  Notice the concept of a relative balance.  OPEC indicates they want to coordinate a relative balance both of

● oil production (avoiding either over-producing or under-producing oil)

oil price (avoiding prices that are either too high or too low)

==============================

Keeping the market supplied

Throughout its 50-year history, OPEC has seen periods of both extremely high and low oil prices. Each time OPEC has tried to respond in an appropriate manner.

OPEC does this by coordinating the oil policies of its Member Countries. 

If demand suddenly grows and supplies fall short, OPEC can increase its oil production in order to keep the market well supplied. On the other hand, if demand suddenly falls and supplies grow, OPEC can slow down production in order to help maintain a balance in the market. 

OPEC’s actions at critical times have demonstrated the Organization’s ability to keep the oil market well-supplied during different kinds of unexpected events, such as wars or natural disasters. 

Stabilizing oil markets

One of the most important parts of OPEC’s mission is making sure that the oil markets remain stable. One way that OPEC tries to do this is by working to avoid price extremes (when oil prices are too low or too high). 

Avoiding price extremes—and sudden changes in prices—is important for producers and consumers. When oil prices are too high or too low, problems can be generated for the global economy.

For example, with extremely high oil prices, it costs more to do things—like run a car, operate a machine or make products like plastics.

But extremely low oil prices also cause problems. If the price of crude oil is too low, then it doesn’t make sense to spend money trying to find more oil. Investments in projects may then fall.

==============================

 

Note that I view OPEC's words above more as rhetoric rather than as actual practice, but the general concept of aiming toward a relative balance is sound.

My version of the concept of aiming for a relative balance is the See Saw.  I've used the analogy of an Oil Price See Saw and also an Oil Supply See Saw.  A relative balance on the See Saw is preferable to either too much or too little production, and also a relative balance is preferable to either too high or too low of oil prices.

Currently, my own prefence of a relative balance of oil prices are in the range of $65.  Saudi Arabia currently appears to favor $80 as their own preference of a relative balance.

In 2015 to 2017, my own preference for a relative balance of oil prices was around $50, and definitely no more than $60.

 

One last note, even though the OPEC Childrens Book is a great resource to explain the very basic fundamentals of oil exploration, production, refining and transportation in its first 4 chapters, some of the later chapters where it implies the self-serving politics that International Oil Companies are the bad guys in black hats, and OPEC was formed as the good guys in white hats, to rescue the world, is amusing.  That amusing political ideology is one reason why I don't feel bad at all to gently poke fun of OPEC's internal squabbles in my thread OPEC soap opera daily update.

 

P.S. it's great to have the freedom to write long comments here.  LinkedIn's character limit can be exceedingly frustrating.

Thanks for your comments, Tom. Let me begin my response by pointing out what I see as a deficiency in your basic view. You say  "I don't recall bringing price anywhere into this particular conversation." My basic contention is that there are only two ways to control production, and one of them is price. So any discussion of production control without a discussion of price would be incomplete. Production can be reduced in a non-pricing action if the supplier is willing to turn away ships seeking cargo or by rejecting nominations. As you are aware, this has happened only occasionally and was not a large feature of the recent OPEC action. They didn't restrain supplies. They merely stepped aside and let others fill the demand. There is a difference. 

While production can be reduced without adjusting the price, the only way to create an increase in production is through pricing. If there is another means  please do me a favor and describe it to me because I do not see it. And if I am correct and the only actual mechanism for increasing production is by changing the price, then a discussion of how OPEC increases production a million barrels a day is, automatically, a discussion of price.

Please address this part of your response before I take on the task of commenting on OPEC's childish ideas of "avoiding either over-producing or under-producing oil" (the law of conservation of matter takes care of this automatically) and "avoiding prices that are either too high or too low" (have you not seen the price chart for the past forty years that ranged from $10/B to $150/B? I would say that they have avoided neither.)

Share this post


Link to post
Share on other sites

8 hours ago, William Edwards said:

While production can be reduced without adjusting the price, the only way to create an increase in production is through pricing. If there is another means  please do me a favor and describe it to me because I do not see it. 

William, we disagree on the bit I bolded above.  Too simplistic.

Here's one example: U.S. tight oil producers (aka frackers) are a herd of cats, who apparently depend on low cost credit (next to zero interest rates) to finance drilling new wells.  This point may wrankle a few readers, but that's the way I see it.

Anyway, if interest rates for loans in the U.S. return to near zero rates again, expect an increase in new fracking oil & gas wells and an increase in production, regardless of oil prices.  Due to low financing costs.  And not directly because of oil prices.

Here's another example: 

"Kenya has set a target of drilling over 200 more oil production wells that will pour forth up to 80,000 barrels of crude per day as the government eyes early petrodollars. "

Keyna is going to start producing more oil, regardless of oil prices.  The Kenya government plans to ramp up their newfound oil production, no matter what the oil price is.

8 hours ago, William Edwards said:

Please address this part of your response before I take on the task of commenting on OPEC's childish ideas of "avoiding either over-producing or under-producing oil" (the law of conservation of matter takes care of this automatically) and "avoiding prices that are either too high or too low" (have you not seen the price chart for the past forty years that ranged from $10/B to $150/B? I would say that they have avoided neither.)

As I mentioned in my comment, I agree with OPEC's concept of a relative balance.  OPEC's implementation of the relative balance concept seems fairly incompetent over the years, but sometimes they get it more right than wrong:

Back over to you.

Share this post


Link to post
Share on other sites

4 hours ago, Tom Kirkman said:

William, we disagree on the bit I bolded above.  Too simplistic.

Here's one example: U.S. tight oil producers (aka frackers) are a herd of cats, who apparently depend on low cost credit (next to zero interest rates) to finance drilling new wells.  This point may wrankle a few readers, but that's the way I see it.

Anyway, if interest rates for loans in the U.S. return to near zero rates again, expect an increase in new fracking oil & gas wells and an increase in production, regardless of oil prices.  Due to low financing costs.  And not directly because of oil prices.

Here's another example: 

"Kenya has set a target of drilling over 200 more oil production wells that will pour forth up to 80,000 barrels of crude per day as the government eyes early petrodollars. "

Keyna is going to start producing more oil, regardless of oil prices.  The Kenya government plans to ramp up their newfound oil production, no matter what the oil price is.

As I mentioned in my comment, I agree with OPEC's concept of a relative balance.  OPEC's implementation of the relative balance concept seems fairly incompetent over the years, but sometimes they get it more right than wrong:

Back over to you.

You have pointed out the reason for our non-agreement, Tom. I am addressing "production" while you are addressing "production capacity". There is a big difference. And my entire thrust is to get you to think through how a producer who has more productive capacity than demand can increase his actual production. Can you indulge me and address my comments while sticking rigorously to the fact that when I say "production" I am referring to oil produced and moved out of the producer's facility, not theoretical or even existing spare producing capacity. I am concerned about the flow of oil, not the imaginary or hoped-for concept of production.

Regarding your statement that a cartel's performance is validated by what it intended to do, not by what it actually accomplished; OPEC intended to achieve stable prices. Give them full credit, even though their 40-year history of price instability exceeded any extended period of pricing history. Sorry, but I cam not comfortable with that type of performance rating. All students do not deserve A's because they tried.

Back to you.

Share this post


Link to post
Share on other sites

4 hours ago, William Edwards said:

You have pointed out the reason for our non-agreement, Tom. I am addressing "production" while you are addressing "production capacity". There is a big difference. And my entire thrust is to get you to think through how a producer who has more productive capacity than demand can increase his actual production.

But that is not the current situation.  The current situation is that production may not be able to keep up with demand:

The Bullish Truth Of OPEC’s Agreement

However, even if Saudi-Russian cooperation persists for years to come, it wouldn’t change the fact that the oil market is still tight and the addition of Saudi oil to the market lowers global spare capacity. “The global oil market will likely continue to experience a deficit under most scenarios,” Bank of America Merrill Lynch said in a note. The bank sees Brent rising to $90 per barrel in the second quarter of 2019.

Ultimately, the goal of OPEC and its non-OPEC partners since 2016 has been to drain the surplus and bring the market back into balance. Now, with the market balanced, it would make little sense for them to flood the market. As such, the agreed upon increases are intended “to keep inventories towards more normal levels and not push the market into oversupply,” Goldman Sachs said in a note.

17 hours ago, William Edwards said:

While production can be reduced without adjusting the price, the only way to create an increase in production is through pricing. If there is another means  please do me a favor and describe it to me because I do not see it. And if I am correct and the only actual mechanism for increasing production is by changing the price, then a discussion of how OPEC increases production a million barrels a day is, automatically, a discussion of price.

Again, we disagree. See above quote from article.  OPEC is going to increase production.

For clarity, you said:

"the only way to create an increase in production is through pricing."

No, it's not.  I just provided the example above.  OPEC is increasing production and production regardless of price.

4 hours ago, William Edwards said:

Can you indulge me and address my comments while sticking rigorously to the fact that when I say "production" I am referring to oil produced and moved out of the producer's facility, not theoretical or even existing spare producing capacity. I am concerned about the flow of oil, not the imaginary or hoped-for concept of production.

Again, see above.  OPEC (mostly Saudi Arabia) is increasing actual production, regardless of price.

4 hours ago, William Edwards said:

Can you indulge me and address my comments while sticking rigorously to the fact that when I say "production" I am referring to oil produced and moved out of the producer's facility, not theoretical or even existing spare producing capacity. I am concerned about the flow of oil, not the imaginary or hoped-for concept of production.

But spare production capacity is neither theoretical nor imaginary.  It is actually  defined, and darn expensive to maintain:

OPEC has no answer for its spare oil capacity problem

A basic rule of thumb is spare capacity is the amount of oil a producer can bring on stream at short notice. The International Energy Agency defines this in terms of crude which can be produced within a 90-day period and sustained for an extended phase of time. But few producers can meet those criteria.  ...

With about 2 million b/d of spare capacity, Saudi is in an enviable position, even in a group which controls almost 82% of the world's proven reserves. Maintaining this buffer is expensive for a kingdom, which has been forced to run budget deficits and requires prices around $80/b for its treasury to break even.

"It costs us between capital and 'opex' tens of billions of dollars to keep 2 million b/d of spare capacity, and we weigh very carefully whether it needs to increase or not," Saudi oil minister Khalid al-Falih said Friday. "I think, at the end of the day, we have to look at what other countries are doing. Many other countries have announced intentions to increase capacity and we're watching what the US is doing.

"I think 2 million barrels of spare capacity is very high for one country to have and it's very expensive. I don't want Saudi spare capacity to be 3 million-4 million b/d."

Share this post


Link to post
Share on other sites

6 hours ago, Tom Kirkman said:

But that is not the current situation.

Tom,  my intention is not a discourse on the entire current situation. We can do that when you wish. My question is narrowly focussed. I am trying to address the subject of production as presented in the title of the original posting "OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase". The subject is concerned with production, not spare capacity. OPEC apparently intends  to add another million barrels of supply from their facilities to the system each day. I am trying to discuss, in real operational terms, how this objective can be achieved. If you are opposed, for some reason, to such a discussion, then we can agree to turn our attention elsewhere. But I believe that trying to think through how this might actually be implemented will reveal the limitations on their choices of action needed to actually get the job done. While it is entirely possible that some unexpected catastrophe might disable a million barrels a day of non-OPEC supply and create a hole for the OPEC increase, is that a realistic planning basis for OPEC? Did they have that in mind when they announced their increase? I think not. So I am trying to probe the options that exist for them to achieve their objective if the oil business continues as "normal".

Knowing you over the years, I doubt that you will intentionally close your mind to a valid question. So I must conclude that I have been unable to communicate effectively. That distresses me. Thus I keep trying to come up with effective words. I am simply asking what is the operational mechanism by which OPEC can unilaterally, on their own, create an additional flow of a million barrels a day of their oil into the market. Are you interested in discussing my question as presented?

Share this post


Link to post
Share on other sites

William, yes please, let's discuss this.  My reply inserted below in italics:

8 hours ago, William Edwards said:

Tom,  my intention is not a discourse on the entire current situation. We can do that when you wish.

●  Agreed.  This thread has gotten far too complicated.

My question is narrowly focussed. I am trying to address the subject of production as presented in the title of the original posting "OPEC Ministers Agree In Principle On 1 Million Barrels Per Day Nominal Output Increase". The subject is concerned with production, not spare capacity. OPEC apparently intends  to add another million barrels of supply from their facilities to the system each day. I am trying to discuss, in real operational terms, how this objective can be achieved.

●  Agreed. Let's keep the discussion focused on this single point.

If you are opposed, for some reason, to such a discussion, then we can agree to turn our attention elsewhere.

●  I'm not opposed to having a discussion about this.  This thread simply got too diversified and complicated with multiple topics.  As you mentioned, let's focus the discussion on a single topic - production.

But I believe that trying to think through how this might actually be implemented will reveal the limitations on their choices of action needed to actually get the job done. While it is entirely possible that some unexpected catastrophe might disable a million barrels a day of non-OPEC supply and create a hole for the OPEC increase, is that a realistic planning basis for OPEC? Did they have that in mind when they announced their increase? I think not. So I am trying to probe the options that exist for them to achieve their objective if the oil business continues as "normal".

●  Noted.

Knowing you over the years, I doubt that you will intentionally close your mind to a valid question.

●  Heh heh, you know me pretty well, William.  Valid questions are not something to run away from, and I ENCOURAGE people to voice up, have open discussions, voice, dissent in a friendly manner, and generally utilize the grey cells conveniently packaged together inside our skulls.

So I must conclude that I have been unable to communicate effectively. That distresses me. Thus I keep trying to come up with effective words.

●  Don't be distressed.  This thread tackled too many issues at once.  You can see how complex my last reply was.

I am simply asking what is the operational mechanism by which OPEC can unilaterally, on their own, create an additional flow of a million barrels a day of their oil into the market.

●  Noted that this is the focus of the discussion.  Production.

Are you interested in discussing my question as presented?

●  Yes.  I am guessing we will not agree on some parts, but that is not an issue.  You make you points, I'll make my points, and we will see what ideas we agree on and what ideas we don't agree on.

Side note, basically everything I do here is by using my small phone screen, not a laptop.  With the limited screenspace on my phone, it can be difficult to bounce back and forth to different pages in a thread and reply to multiple points.  So keeping this discussion narrowed down to one specific topic should be easier to manage.

Share this post


Link to post
Share on other sites

I think I have to put some more thought into this. We have some pretty passionate discussions ongoing on the subject of supply, demand, and price. All of which are fascinating. While I've taken the obligatory micro and macro econ courses, I must confess that was decades ago and I've forgotten most if it. I did, however, spend a decade in production planning. While I had no control over pricing, I did have control over production quantities (and the equipment needed to do that). I had no say in sales but was responsible for forecasting. Production runs were reactionary based mainly on (actual and projected) sales and inventory, and to a lesser extent efficiency. My mandate was to ensure 100 percent fill rate in the most efficient way possible, within warehousing limits and machinery limits. I will say that I don't ever recall producing something that I didn't think would be sold. And unless it was a very small volume product, I don't recall planning a production run to run up inventory, which surely would be counterintuitive and would have caught someone's attention. But if sales had slumped after I ran a significant volume up of something, I would definitely have cutback production if I could do so without screwing myself in the future (for example by suggesting short term staffing cuts that I might not be able to get back quickly, etc). 

that's not to say that some plants didn't run stuff that they were not supposed to run.

I'm sure somebody in another department changed prices as they saw fit to meet sales quotas and what not. but in my experience, sales and production were separately managed,  with sales driving. what drove price, I  neither knew nor cared, but I'm pretty sure that it wasn't inventory driven. 

As a side note to my crazy rabbit hole time, I absolutely could have increased production of any given product just for the heck of it if I had wanted to, but I think I would not have been long employed. 

PS Rant: is anybody else maddened by the ineptitude of speech-to-text technology? it is 2018 people!

  • Like 1
  • Upvote 1

Share this post


Link to post
Share on other sites

3 hours ago, Rodent said:

I think I have to put some more thought into this. We have some pretty passionate discussions ongoing on the subject of supply, demand, and price. All of which are fascinating. While I've taken the obligatory micro and macro econ courses, I must confess that was decades ago and I've forgotten most if it. I did, however, spend a decade in production planning. While I had no control over pricing, I did have control over production quantities (and the equipment needed to do that). I had no say in sales but was responsible for forecasting. Production runs were reactionary based mainly on (actual and projected) sales and inventory, and to a lesser extent efficiency. My mandate was to ensure 100 percent fill rate in the most efficient way possible, within warehousing limits and machinery limits. I will say that I don't ever recall producing something that I didn't think would be sold. And unless it was a very small volume product, I don't recall planning a production run to run up inventory, which surely would be counterintuitive and would have caught someone's attention. But if sales had slumped after I ran a significant volume up of something, I would definitely have cutback production if I could do so without screwing myself in the future (for example by suggesting short term staffing cuts that I might not be able to get back quickly, etc). 

that's not to say that some plants didn't run stuff that they were not supposed to run.

I'm sure somebody in another department changed prices as they saw fit to meet sales quotas and what not. but in my experience, sales and production were separately managed,  with sales driving. what drove price, I  neither knew nor cared, but I'm pretty sure that it wasn't inventory driven. 

As a side note to my crazy rabbit hole time, I absolutely could have increased production of any given product just for the heck of it if I had wanted to, but I think I would not have been long employed. 

PS Rant: is anybody else maddened by the ineptitude of speech-to-text technology? it is 2018 people!

Thanks, Rodent. Apparently you agree that actual experience is a wonderful ingredient to utilize in commenting on operations.

Share this post


Link to post
Share on other sites

4 hours ago, Tom Kirkman said:

William, yes please, let's discuss this.  My reply inserted below in italics:

Side note, basically everything I do here is by using my small phone screen, not a laptop.  With the limited screenspace on my phone, it can be difficult to bounce back and forth to different pages in a thread and reply to multiple points.  So keeping this discussion narrowed down to one specific topic should be easier to manage.

You are unbelievable, Tom. If I had to use an iPhone to type text I would give up before long.

Now, may we return to my basic statement with which you disagreed?  the only way the producer can create an increase in production is through pricing. 

Can you point to another way? Remember - actual increase in the flow of oil, not just capacity to produce.

Share this post


Link to post
Share on other sites

Ok William, no worries. I'm tied up in a meeting this afternoon, and will resume this conversation tonight.

Share this post


Link to post
Share on other sites

On 6/27/2018 at 12:00 PM, William Edwards said:

You are unbelievable, Tom. If I had to use an iPhone to type text I would give up before long.

Now, may we return to my basic statement with which you disagreed?  the only way the producer can create an increase in production is through pricing. 

Can you point to another way? Remember - actual increase in the flow of oil, not just capacity to produce.

@William Edwards, sure, an oil producer can increase production (actual production) regardless of pricing.  

Marina has already pointed out that Kenya is already physically producing more oil, and will continue to try to maximize their fledgling oil production regardless of prices:

=====================

Kenya has set a target of drilling over 200 more oil production wells that will pour forth up to 80,000 barrels of crude per day as the government eyes early petrodollars. Pretty ambitious.

=====================

Exhibit 2: Trump tweets:

image_36480f95-dcae-4a36-b590-81e127c1b5d520180701_061631.jpg

William, you state:

the only way the producer can create an increase in production is through pricing. "

Note that Trump's tweet above implies that oil production will control pricing. And not that pricing will control pricing.  The "control" in this instance is Trump. (An amusing wild card).

5b3296fbb08f4.png.81d268f6c728b3a9878bf209457361e6.png

Share this post


Link to post
Share on other sites