OPEC at Algiers: Breaking Down the Numbers
September 29, 2016 Pre-market
With the recent developments surrounding OPEC’s Algiers meeting, we thought it might prove useful to break down the numbers and provide a little clarity more concerning how a production freeze deal could impact the market in the near future. At the time of this report, there are no official OPEC statements available that would allow us to glean more concrete information; however, a few data points could show what’s at stake in the event that the group decides to ratify this production freeze/cut deal in the upcoming November 2017 official OPEC meeting. As it stands, we view the potential implications from the results of the Algiers meeting as a substantial positive for crude oil markets, which we will outline below.
KEY POINTS
Crude oil and product markets rallied approximately $3.15 bbl from the intraday lows Wednesday coinciding with headlines suggesting that OPEC members have come to an understanding that a production freeze/cut is necessary to expedite global supply-demand balancing.
Importantly, a deal has not been ratified at this point, but the proposal is expected to be tabled in the upcoming official OPEC meeting in November. No official statement has been released from any participants as of this report; however, a substantial shift in policy and a few key data points have been disclosed which we believe should be highlighted.
• The proposed deal would establish a 1.62% decrease in average production levels observed from January through August 2016 for twelve members. Nigeria and Libya were exempt from any restrictions due to "exceptional circumstances." Total OPEC production would decrease by 796 kbbld for the twelve members impacted from August levels, but increase by 282 kbbld if Nigeria and Libya recover to stated targets .
• Supply-demand balancing would move decisively into a deficit in Q1/17 as OPEC was previously forecast to be the main production growth region. Global demand would slip (marginally) as a result of demand-elasticity to price but remains largely the same.
• Saudi Arabia appears to have changed its policy concerning Iranian production growth. The Saudi Kingdom would not only freeze, but is willing to cut production if Iran agrees to only freeze their output levels. This may be a deeper sign of things to come.