Energy Prospectus

WTI seems to be settling in at $69/bbl this morning as traders decide what the OPEC+ announcements really mean. It is clear that only a few of the cartel members have any surplus production capacity and others (Venezuela, Libya, Nigeria, Angola, etc.) have serious problems. - Dan

After officially meeting on Friday, OPEC gave a press conference on Saturday that implied a bigger increase in supply.

"Saturday's OPEC+ press conference provided more clarity on the decision to increase production, with guidance for a full 1 million bpd ramp-up in 2H18," Goldman Sachs (NYSE:GS) said in a note on Sunday. "This is a larger increase than presented Friday although the goal remains to stabilize inventories, not generate a surplus," the U.S. bank added.

Largely because of unplanned disruptions in places such as Venezuela and Angola, the group's output has been below the targeted cuts (~700,000 barrels per day in May), which it now says will be reversed by supply increases, especially from OPEC leader Saudi Arabia. Analysts warn however there is little spare capacity for large-scale output increases.

"As yet there is no plan as to how the limits will be reallocated. One simple approach would be to reduce the limits of those not producing enough by 600,000 bpd and increase the limits of members with spare capacity by 600,000 bpd – this would enable 100 percent compliance," said Callum MacPherson, Investec head of commodities.

Goldman Sachs also warned that an "outage at Syncrude Canada's oil sands facility could leave North America short of 360,000 bpd of supply for all of July".

It added that this "will exacerbate the current global deficit, making the increase in OPEC production all the more required".

Goldman Sachs sees Brent crude rising as high as $82 over this summer, as supply and demand fundamentals suggest a continued deficit even in the face of expectations of OPEC agreeing to lift production. < If Brent goes to $82 (trading at $74.20 this morning), then WTI should move toward $75/bbl.

Senior portfolio manager at Wells Fargo Capital Management, Ann Miletti, believes the Permian Basin's shipping issue is “temporary” and will be resolved. Cimarex, Matador and Parsley, are “high-quality names” with strong balance sheets and management teams, but are currently oversold, she argues. Once those issues are resolved, shareholders will be rewarded, according to Barron’s.

Jefferies’ analyst Mark Lear also sees the market sell-off of Permian-region stocks as overdone, creating great buying opportunities. He recently upgraded Cimarex from a Hold to a Buy with a price target of $107, about 10% above where the stock was trading at the close of trading on Friday. He expects the company will soon be returning more cash to shareholders.

He also reiterated his Buy ratings on Diamondback, Concho, and Callon, as he raised his forecasts for Brent crude prices from $64 to $77 through the end of this year, from $60 to $75 through next year, and from $65 to $70 through 2020.

OilPrice.com: "PIRA founder Gary Ross and fund manager Pierre Andurand also added calls for substantial upside risk for crude in the medium term this week. The IEA and OPEC also commented that they see global supply deficits in excess of 1.5m bpd in 2H18. With global inventories and Days of Supply in the US both sinking below their 5yr averages it’s becoming easier to see why the market has upside potential opposite strong global economic growth."

Unexpected outages in Venezuela, Libya and Angola have effectively brought supply cuts to around 2.8 million b/d in recent months.
"OPEC+ production increases will be enough for now but not enough for the fourth quarter to address a decline in Iranian and Venezuelan exports," said Gary Ross, head of global oil analytics at S&P Global. "There isn’t a lot of spare capacity in the world. If we lose a million b/d of output from Venezuela and Iran in the fourth quarter, where will all these barrels come from? We are in for higher oil prices for longer."

On 6/20/2018, Reuters reported Venezuelan PDVSA's oil exports declined 32% in the first half of June compared with May, according to internal trade reports from the state-run company. PDVSA exported 765,000 b/d in the first two weeks of June, a 368,000 b/d drop versus 1.13 million b/d shipped in May.

On 6/22/2018, Reuters reported the head of Libya's National Oil Corporation (NOC) confirmed on Friday that Khalifa Haftar's Libyan National Army (LNA) had regained control of the key oil ports of Ras Lanuf and Es Sider, and said he hoped operations would resume in the "next couple of days." NOC Chairman Mustafa Sanalla said Libya had been losing 450,000 b/d of production after clashes between the LNA and rival factions closed the two terminals. The LNA took the ports back on Thursday in heavy fighting a week after an attack by anti-Haftar armed groups had forced them to withdraw.