- OPEC Oil Production Higher. If there is one takeaway from the oil market, OPEC oil output in June increased by about 280,000 bpd per Reuters – and total production can be seen in the graph to the right (including June’s estimate). Libya and Nigeria are on track to increase oil output and exports through the end of 2017 as Libya broke the 1 million bpd level, the highest in four years. It is still a country in conflict but Field Marshall Khalifa Haftar, announced that his forces had taken Benghazi and the majority of Libya’s oil fields and her export facilities. The remaining Western half of the country will undoubtedly be his next focus. Nigeria’s recovery looks to be in place with exports looking to reach over 2 million bpd in August, a seventeen-month high. Saudi Arabia and Iran both increased exports in June though production was only marginally higher. Recall that Saudi Arabia cut significantly more than their quota in order to make up for non-compliance from other states so they have a lot of room. There is lots of chatter of new cuts but it seems that Saudi Arabia will demand that Iran conform to limits – a negotiation killer. Venezuela is the main risk I see as that country spirals into chaos – Presidential supporters just rushed the parliament and attacked opposition members. Deteriorating refining operations means that the country has to import gasoline using money it does not have and other countries will not lend it. They are not even paying the Russians, one of their key ideological backers. They did sell $2.8 billion in bonds in face value to Goldman Sachs’ investment division but received only 31 cents on the dollar. Finally, there is lots of ready oil supply on tankers currently as well as production capacity from the US, Saudi Arabia and Russia to counter any panic buying.
- US production is doing just fine as oil rigs were added to bring the total count up to 756 on June 30th. Total US production plateaued versus May’s number though U.S. shale oil production is expected to rise for a seventh consecutive month in July, according to a forecast from the U.S. Energy Information Administration. In only looking at shale production, it is forecast to grow by 127,000 bpd to a record 5.48 million bpd. The count of US drilled-but-uncompleted wells rose to a three-year high so pent-up supply is in place as well. As a reminder, Canada’s production is on the upswing too with an additional 270,000 bpd projected for 2017 and 320,000 for 2018. The graph to the right reminds us that there is plenty of production available, especially if the 12-month price average is $55 or higher. Mexico completed a major auction of shallow-water oil and gas production blocks so their production could start to turn around in the next year or two.
- Oil Demand / Politics. In good news for US and Canadian oil producers and bad for OPEC and friends, both China (averaging 100,000 bpd so small but something) and now India (first sale just announced and for October delivery) are buying North American production for the first time. Not just here up north – Brazil’s exports have tripled since 2013 to 1.2 million bpd. Chinese refinery demand is seen falling in the 3rd quarter by around 1.3 million bpd as they go into maintenance after crude oil imports rebounded to the second highest on record in May. Back to the US, wind and solar in March accounted for 10% of U.S. electricity generation for first time per the EIA. In politics, the verbal conflict between Saudi Arabia (and others) versus Qatar is still a minor issue but the elevation of Mohammed bin Salman to Crown Prince of Saudi Arabia is quite important in that it confirms the economic drive away from the country’s utter dependence on oil. It also moves the line of succession to the next generation and more – the Crown Prince is only 31 years old versus the King’s 81. These moves earned Saudi Arabia an upgrade to the MSCI Emerging Markets Index. Saudi shares jumped 5.5% on the day despite weak oil prices.
- Plenty of Food While heat is threatening US and Canadian yields during the critical growing season up north, bumper crops in Argentina and Brazil are poised to limit the impact. U.S. farmers seeded a record amount of soybeans this spring, the government said in June, amid hopes that strong export demand will soak up much of the harvest this fall. The FT graphs to the left provide some interesting context – lots of demand, lots of supply and China at the middle. All-wheat plantings fell to a record low of 45.657 million acres, with ample global stocks and weak export prospects pushing U.S. farmers away from that crop. How those acres are redeployed into other crops is the question. US beef is now clear for direct export to China (instead of being transshipped from Hong Kong, Vietnam and Taiwan), though the specifications are relatively strict, limiting immediate qualified supply. Ghana’s main 2016-17 cocoa crop hit a six-year high of 882,000 tonnes, up 12 %and above official forecasts. The tally means the world’s second largest cocoa grower is having a banner year – and the smaller “mid-crop” has yet to be counted!
Best of investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
Special contributor to aiSource