From the time an oil well begins producing, it's a constant battle to keep production flowing, lower production costs and protect producing and reserve assets against a backdrop of fluctuating oil prices. Reducing output threatens profitability as overall costs need to be allocated to remaining production. After all, there is no guarantee that reducing production will lead to a commensurate increase in market prices for most individual producers.
Along those lines, OPEC was founded in 1960 to coordinate the petroleum policies of its members and to provide member states with technical and economic aid. The group has agreed to define OPEC’s mission as follows: “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.”
Tonight we take a look back at the last 2+ decades in oil markets: book-ended by a failure of OPEC to reach agreement on supply cuts.
1998-1999: The Start of OPEC Disagreements
We start with headlines from 1998/1999. The first headline on the left looks eerily similar to those we are seeing after last week's OPEC meeting.
Markets reacted as expected after each headline as can be seen below (initial selloff of over 30% in late 1998 followed by an impressive 100% rally off of lows in 1999):
Yet, distillate cracks stayed in a fairly tight range during 1998/1999 as outright prices collapsed and subsequently rallied. It took almost 2 years for 'products' to catch a bid and lead the market.
Zooming out to look at month one futures from 1998 - present in both oil and oil crack spreads to distillates we get a bit more context regarding current prices:
2008 - 2009: Supply Shocks
Following the OPEC drama leading up to the new millennium, the next 10 years presented significant supply-side shortages. The steep ascent in the price of oil between 2004 and 2008 coincided with the first significant decrease in non-OPEC supply since 1973 and an unprecedented surge in global demand. Although OPEC members responded by increasing their production, they lacked sufficient capacity after years of restrained field investments to bridge the growing gap between global demand and non-OPEC supply.
Supply-side issues culminated in 2008 as oil prices hit a peak price above $140.
2008 Highlights:
February: Venezuela cut off oil sales to ExxonMobil during a legal battle over nationalization of the company’s properties
March: saboteurs blew up the two main oil export pipelines in the south—cutting about 300,000 barrels per day from Iraqi exports
April 25: Nigerian union workers went out on strike, causing ExxonMobil to shut in production of 780,000 barrels per day from three fields
April 27: Scottish oil workers walked off the job, leading to closure of the North Forties pipeline that carries about half of the United Kingdom’s North Sea oil production
May: As of May 1, about 1.36 million barrels per day of Nigerian production was shut in due to a combination of militant attacks on oil facilities, sabotage, and labor strife
May: Mexican oil exports (tenth largest in the world) had fallen sharply in April due to rapid decline in the country’s massive Cantarell oil field
June 19: militant attacks in Nigeria caused Shell to shut in an additional 225,000 barrels per day
June 20: Nigerian protesters blew up a pipeline that forced Chevron to shut in 125,000 barrels per day
This all came at a time of unprecedented global economic expansion and exceptional oil demand in China. The US was also still dependent on crude oil imports as it had not yet unlocked the potential of it's shale reserves.
We can thank US production for muting the impact of supply shocks since 2008.
2020: The Current OPEC Disagreement
"Global Oil Producers Face Brutal Reckoning After Epic OPEC+ Fail" -Bloomberg
″$20 oil in 2020 is coming,” Ali Khedery, formerly Exxon’s senior Middle East advisor and now CEO of U.S.-based strategy firm Dragoman Ventures, wrote Sunday on Twitter.
Headlines have gotten a bit more dire since 1998 in their reporting of OPEC's failure to reach a production cut deal! In 1998, there was ultimately a 33% decline in WTI futures, which would equal a selloff of $7.50 from Friday's closing prices. For perspective, as of Sunday night's open, WTI prices were down almost $10.00. That's quite a selloff in a single session. If history is any guide, someone will eventually blink. "After all, OPEC members are just producers trying to make a buck like the rest of us...."
INVENTORY RECAP
The demand loss from the coronavirus is certain to increase US inventories. As we see below, while we are not at the high levels seen during 2016-2017, total US inventories are a worry (red line below).
As a result, 1-month calendar spreads have moved gingerly into contango. These will only get wider if the US begins to max out traditional storage capacity space, at which point calendar spreads would move make a significant move.
Weekly Stats
The EIA inventory report for week ending February 28, 2020 reported a total inventory DRAW of (7.60) million barrels with Crude oil showing a slight build.
Year-to-date, this bring us to a Total Inventory BUILD of 13.10 million barrels.
As noted above, inventory LEVELS compared to this same week in previous years continue to show product inventories slightly above the prior 2-year levels.
And while it couldn't come at a worse time, remember that the US is selling up to 12 million barrels from the Strategic Petroleum Reserve during April and May to fulfill the Bipartisan Budget Act of 2015 and the SPR Life Extension Phase II project:
DOE must receive bids no later than 2:00 PM Eastern Time on March 10, 2020. DOE will award contracts to successful offerors no later than March 20, 2020. Deliveries will take place in April and May of 2020.
Lee Taylor - Technical Levels
BRENT
Resistance: 41.26
Support: 36.11/35.75/34.08
Brent should come in and test 36.11 right away then 34.68 and 33.75. In my opinion, we should complete the moved down to 27.10. Resistance will be above at 41.26 on any type of rebound. We expect Brent spreads to be sold off early on and watch May/June Brent to trade under its recent February low of -.40 and head towards -.80. Technically, I don’t see Brent spreads holding and not making new contract lows on anything.
WTI
Resistance:
Support: 38.39/34.69/33.55
My expectation that 42.05-42.36 would be the bottom and the catapult the market needed to rebound back into the $50s was thrown out the window the second the Russians balked at a massive production cut at Friday’s OPEC meeting. The first support level we will run into is 38.39 then 34.69 – both levels from 2016. We then will back up to early 2009 when the market bottomed at 33.55. This level of $33.55 could be the first area that comes into play as I am hearing that we could open $9 lower than Friday’s close. If $33.55 can’t hold up then we look to $27.50 from early 2016 then $26.05. Resistance levels aren’t going to come into play until there is some drastic OPEC or Coronavirus news; however, if the expected sell off does occur then look for 35.19 then 39.13.
RBOB
Resistance:
Support: 1.3752
April RBOB had come really close to the monthly trendline support level which was 1.3752. If WTI and Brent open up down $10 then RBOB should test 1.0154 close to the onset of the trading day. The next level after that is .9669. We can also look to late 2008 to find our final support level of .8260.
HEATING OIL
Resistance: 1.2466
Support: 1.169/1.1287
The heating oil market will follow the rest of the complex. Resistance will be found at 1.2466 with support 1.169 then 1.1287
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