November 30 meeting in Vienna will be an answer for further price direction. The most probable outcome is expected to be some minor actions from Saudi Arabia and its allies. This scenario looks already priced in. It is also our base-case and we retain our expectation for $40-50 range-bound trading till the end of this year.

By the end of October, the price has returned to the level prior OPEC announcement of its intentions to balance the market. Oil fundamentals have weakened sharply since September. It became obvious in the middle of October that oversupply is more extensive than it had been believed before. Brent crude oil spot price had surged by $4.1 per bbl or 8.3% to $53.1 per bbl by October 10 to fall by $0.8 per bbl or 1.5% mom as the result of the reporting month. 

The main problem with OPEC intention to balance the market is that the overall production has increased substantially from the beginning of discussion and the proposed production cut of 0.5-1 mln bbl / d looks insufficient for achieving balance in 2017:

·    1.     Crude oil from Libya and Nigeria is returning to the market.

• Libya plans to boost production to 900 thsd bbl / d at end-2016 and 1.1 mln bbl / d in 2017 from current 600 thsd bbl / d, announced NOC’s chairman Mustafa Sanalla. 

• Nigeria has got some success in its struggle to recover production despite militants’ attacks.

     2.    While Saudi Arabia is remaining its oil production on 10.6 mln bbl / d level, despite usual reduction in demand after summer season, Iran surged its production by 250 kbpd in October.

·    3.   Non-Opec producers are also increasing activity:

• Russia's oil output set a new post-Soviet era record high in October, rising 0.1 percent from September to 11.2 mln bbl / d, energy ministry data showed. 

• Forecasts for U.S. oil production in 2017 from Energy Information Administration have risen steadily over the last four months. Crude oil production in the USA increased in October by 137 thsd bbl / d or 1.6% in comparison with September data and decreased by 534 thsd bbl / d or 5.7% in comparison with October 2015 figures.

According to the most recent EIG assessments of worldwide crude oil production total crude oil output in non-OPEC states grew in October by 466 thsd bbl / d or 1.0% to 48.68 mln bbl / d. Non-OPEC oil production in October was even higher comparing to the numbers of October, 2014 (48.52 mln bbl / d) and October 2015 (48.42 mln bbl / d). China is one of the few places with lowering production. October production in China was 3.78 mln bbl / d, the lowest since May 2009, and down from 3.89 mln bbl / d in September, according to the National Bureau of Statistics report.

Supply from the Organization of the Petroleum Exporting Countries has risen to 33.82 mln bbl / d in October from a revised 33.69 mln bbl / d in September, according to the survey based on shipping data and information from industry sources. According to Bloomberg assessments, total OPEC oil production in October grew by another 0.5% mom or 170 thsd bbl / d to new record high of 34.02 mln bbl / d. The largest contribution to the increase in OPEC oil production increase was made by Nigeria (+170 thsd bbl / d), Libya (+180 thsd bbl / d), Iran (+50 thsd bbl / d) and Iraq (+50 thsd bbl / d), while Saudi Arabia, Qatar and Venezuela slightly reduced output by 20 thsd bbl / d each. Angola marked the most noticeable change to its production, decreasing output by 230 thsd bbl / d. From a y-o-y basis in October the cartel ramped up its total output by 6.2%. Iran demonstrated the most annual crude oil production growth (+880 thsd bbl / d or 31.4%), followed by Iraq (+373 thsd bbl / d or +8.8%) and Saudi Arabia (+280 thsd bbl / d or +2.7%). The most significant annual production decrease was observed in Nigeria (-349 thsd bbl / d or -17.3%) due to continuous NDA attacks and leaks. Angola and Venezuela also produced less crude oil in October than a year ago. Libya finally recovered some of its lost export, increasing output by 90 thsd bbl / d or +20.9 y-o-y.

Ministers are expected to discuss the proposed production cap of 32.5-33 mln bbl / d during a Nov. 30 meeting in Vienna. Production cut is anticipated by the market, but its volume will likely be insufficient. If the meeting is completely unsuccessful, the price will have a chance to go below $40 per bbl, potentially to test this year’s minimum. Hence, it is in the interests of Saudi Arabia and its Gulf’s neighbors to prove their intentions with some actual deal.  Our base-case scenario for meeting’s output is the minor production cut (no more than 0.5 mln bbl / d) with Saudi and its allies to burden the bulk of that.   

Three meeting’s scenarios and crude oil price reaction:

1.       Our base-case: minor production cut. Crude oil keeps on trading in the $40-50 per bbl range.

2.       No deal. Short-side traders will start a new cycle of growing short positions in the market and eventually lowering price till some announcement of the next extraordinary meeting by crude oil exporters.

3.       Saudi Arabia gives up on its market share strategy. The high end of trading range will be finally at risk of breaking out.

Global oil inventories in highly developed states (OECD) are still on very elevated levels although the general pace of oil stocks build-up decreased in recent months. Pursuant to the most recent IEA monthly report, total OECD commercial oil stocks declined in August 2016 (the last reported month on oil stocks) by 10.0 mln bbl (-0.3%). The most part of the decline was the result of crude oil inventories fall by 26.9 mln bbl (-2.2% mom), while total OECD products stocks were added 18.7 mln bbl (+1.2% mom). The same time in comparison with a year ago figures total OECD commercial oil stocks in August 2016 jumped on 145.3 mln bbl or 4.9% yoy with crude oil stocks grew by 49.9 mln bbl (+4.4% yoy) and oil products stocks increased by 98.0 mln bbl (+6.6% yoy).
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25 November 2016, Arbat Capital

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