Thursday Over Night Reading – OPEC cuts 1.2 mmbopd
Posted by zmann on October 19, 2006
OPEC Officially Cuts Production by 1.2 mmbopd, or 4.3%. Cuts are to be made from current production levels starting November 1. The cartel will officially reduce production from September levels of 27.5 mmbopd (excluding Iraq) to 26.3 . See the press release.
Highlights with comments:
–Beginning the cut Nov. 1 is a bit more aggressive than many believed likely, including Saudi who has already said that Asian crude shipments would not be reduced during November.
–Cutting from production instead of quotas will is also slightly more bullish than anticipated but it also raises the likelihood of cheating on the parts of those countries already operating below quota. The cuts range in percent of production from 3.3% (Algeria) to 5.4% (Venezuela) but most are in the low 4% range.
— If Opec statement of current production of 27.5 mmbopd is to be believed, they’ve already cut 1.15 mm bopd since June 2006 (when OPEC ex Iraq production registered 28.65 mmbopd) and yet inventories here and abroad continue to run well above 5 yr average levels.
–The meeting was chaired by the alternate president of Opec from the UAE, not the current sitting president from Nigeria. That lends the meeting an air of credibility and was probably demanded by the Saudis for them to show up at all.
—Saudi Arabia, who accounts for over a third of Opec total production is cutting the largest single country amount at 380,000 bopd (4% of Suadi production), or about 31% of the total reduction. Traders would be more comforted about the cut if the Saudi’s shouldered a bigger share of the production cut pie but for reasons already stated, they didn’t. It’s obvious the Saudis are pissed about the disorganized way this cut was arrived at.
—Iran, Venezuela, and Nigeria agreed to reduce output by a combined 414,000 bopd, or 35% of the total cut. Three notorious cheats taking on this much of the cut won’t inspire confidence. On the other, Chavez’ great socialist vision was probably due to force that much production off line anyway through lack of investment.
—Algeria only cut 59,000 bopd so foreign companies operating there including COP and TLM won’t feel much if any of a production pinch.
–Take this with a grain of salt but Iraqi oil production was seen rising through the first six months of the year (up nearly 30% to 2.15 mmbopd) and they no longer pay attention to cartel dictates.
— Notice the statement closes with the mixed message about we will continue to invest to expand capacity and provide adequate oil supplies to the nations of the world. Oh yeah, you guys are swell. If you were running out of oil, then I could understand but your spare capacity just keeps going up
Initial Trading Reaction: Positive. So far a big pop in Nymex futures. Up $0.50 to $59.00 3 hours after the press release. “Buy the rumor, sell the news” may take a bit longer as trades weight the extra unanticipated 0.2 mmbls but I think we will sell off within a few days to test $57.50 on the November crude contract. Technically, if we rally through $61.30 then all my puts are covered and I’m sidelined until we bounce off $65 (if there is any sanity left in the market) Also considering going long SU for a day trade in the morning prior to the “Euro Close Pump” that’s become a daily occurrence on both up and down oil days.