Energy Report - Feeling The Love!

OPEC members are feeling the love as most OPEC members say they are surprised by how good compliance has been. Still, if you look at the OPEC report it seems that some numbers don’t quite add up. The so called secondary sources came in with only a 74% compliance rate as opposed to the 91% that OPEC is touting, but even at 74% that would be a record compliance. Saudi Arabia dismissed the secondary forecast suggesting that it did not account for the entirety of its cut. OPEC is sending a Valentine to U.S. producers even if the Saudi oil Minister is saying that Shale is not keeping him up at night! It is all love and good feelings as the Cartel achieved record compliance.

You see, what is making this OPEC deal work is the determination of the new Saudi oil minister Khalid Al-Falih to make it work. This is his first major intuitive since taking over for the legendary Ali al-Naimi and he is going to accomplish something that Al-Naimi never could and that is an OPEC cut that was compiled with.  

The new oil minister wanted to come in and repair the diplomatic damage that was done when the last OPEC and Non-OPEC accord fell apart last April. Mohammed bin Salman, the powerful Saudi Prince, ended up losing a lot of credibility and it was up to the New Saudi oil Minister to make amends. At the same time the Saudi Prince has big dreams to transform the Saudi economy and move way from its reliance on oil as a driver. Part of that is the Saudi IPO, a big part of Saudi Aramco that will go much better if oil prices are higher. That is why Saudi Arabia is said to cut more than it said it would, to make up for the likes of Iran and Nigeria whose production is still rising.

OPEC also raised its forecast for world oil demand growth to and above average in 2016 to increase by 1.32 mb/d, following an upward adjustment of 70 tb/d to reflect continued better than-expected consumption in OECD Europe and Asia Pacific. Total oil demand is now estimated to average 94.62 mb/d, considering base line adjustments to China of around 0.12 mb/d. In 2017, world oil demand growth is seen to reach 1.19 mb/d, representing an upward revision of 35 tb/d to now average 95.81.

Of course, the oil market still must digest an additional 10 million barrels of oil that will be sold from the SPR this week. It will also have to deal with Fed Chair Janet Yellen whose testimony today could move the dollar and impact the oil price. Despite the headwinds, we still feel the lows for oil are in for the year as OPEC has provided the floor and the shale guys won’t keep up with demand growth.