Another Big Reason To Hate Oil In 2016

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Includes: OIL, USO
by: Gary Bourgeault

Summary

Oil supply in 2016 will increase, not decrease.

Why there is little real interest in cutting oil supply.

Only one OPEC member of importance pushing for agreement.

Supply surprise market wasn't looking for.

It looks like there is a concerted attempt to impose a positive spin on the oil industry, as the financial and general media outlets blare headlines like there is a real chance OPEC and non-OPEC producers are going to get together and agree to cut production in order to support the price of oil.

Another myth is somehow over the next 11 months or so there will be a rebalancing of the market, based upon an increase in global oil demand and production cuts by U.S. shale producers. '

This is apparently going to happen even though a number of key competitors are planning are raising production levels, while other major producers have decided to continue supplying the market at current levels.

Only a couple of OPEC producers with higher production costs are calling for an emergency meeting by OPEC to address the issue, with no signal from Saudi Arabia it has any interest in doing so, citing it wouldn't make sense if non-OPEC countries didn't come and participate, with the determination they would come to a decision while they were there.

Not only won't there be a cut in production and supply by OPEC in 2016, there will be a significant increase in supply, which will keep the price of oil subdued through 2016, and possibly far into 2017.

(click to enlarge) source: Iraq energy Click to enlarge

Why oil supply cuts won't happen in the near future

Being in the publishing industry for a number of years, with most of that in reference to the business and investment sector, it's easy to see some of the reports being released as news are being orchestrated by gatekeepers. This isn't a conspiracy theory. All one has to do is read what they're saying and understand it's an attempt to pressure oil producers into coming to the table to talk, in the case of a desired supply agreement.

Investors shouldn't underestimate the behind the scenes negotiations going on concerning what will be written and covered by writers or talking heads, and how it will be structured.

I mention this in light of the growing number of stories alleging some type of breakthrough between oil producers over supply cuts. The idea is Saudi Arabia has been contacted by important players, especially Russia, over the crisis generated from oversupplying the market. It's a media fabrication. Nothing has changed. It's very unlikely it will anytime in 2016. Don't get drawn into that as a possibility that will have an impact on the oil market. You'll be disappointed if you do.

The problem with supply is it has come from a faulty interpretation of the U.S. shale industry by Saudi Arabia and OPEC, and the overall shale industry in general. It was believed this was another supply cycle as in the past, which if it boosted production and supply, would quickly rebalance as the market had in the past.

Instead, it has been finally understood this is a total disruption of the oil market, with shale oil production being a new player adding significant supply over the next few decades. The near term impact is already visible and evident.

Many analysts and investors still think there will be a rebalancing based upon the way the market acted in the past. Not only is that not the case, I believe Saudi Arabia and other competitors already know this, which is why they're restructuring their spending and government projects in response to the disruption. This is something new, and needs to be understood as such. They wouldn't be taking these unprecedented steps if all that was at stake was a supply cycle.

My take on this is Saudi Arabia and others are buying time by keeping the market oversupplied, as it attempts to slow down the shale industry and make the required budget adjustments in order to deal with an oil market that they'll have to lose some market share going forward.

Finally, when you think it through, Saudi Arabia and OPEC started the price war, and the idea competitors will respond to its call for playing nice together is nonsensical in my view. All that

this would do would help OPEC. It would be able to maintain most of its market share for a couple of years, while its competitors agree to lower their market share. Again, that's not going to happen.

The reason I say OPEC could probably maintain its market share for a couple of years is eventually there will be enough of an increase in global demand where the market will rebalance. it won't happen in the near future, but it will happen. At that time, once OPEC is producing at the highest levels it is capable of, the amount of demand will have to be supplied by non-OPEC members. That means while OPEC may keep its level of production high, and revenue coming in at the price range of that future time, the oil market itself will expand, which means as measured by percentages, OPEC will be forced to give up share. It will have no more supply to offer the market.

Major competitor pushing for supply agreement

While the financial press reports a push toward a supply agreement by a growing number of countries, the truth is there is really only one country that matters making the noise, and that is Venezuela. Since it's has the largest proven reserves in the world at this time, that in itself makes it important.

Why it's continually making its demand is because it is among the higher cost producers in OPEC, and is probably taking the biggest hit of all member states. It has the potential of unseating the existing government and result in a new one in its place.

Venezuela isn't likely to be helped because of some of the past way it treated private producers, when they nationalized its industry after a lot of capital was poured into the sector.

Taken together, most members of OPEC are ignoring its calls for help, which is all this is, and I don't believe there is the will to bring aid to the country by helping competitors by supporting a higher oil price.

The remaining countries siding with Venezuela are irrelevant on the national stage.

Supply surprise

In my opinion, what has really shaken the market and cut through the false narrative, is the announcement by Iraq it had brought a record supply to the market in December. Worse, it said it will bring more supply to the market in 2016. This further undermines any illusion OPEC is moving in unison with one another. For all practical purposes, it no longer exists.

As for Iraq's numbers, it produced 4.13 million barrels per day in its southern region. The remaining production comes in the Kurdish-controlled area, which doesn't have an impact on exports.

For the entire month, Iraq produced 128 million barrels, with just under 100 million barrels being exported.

The importance of this is during a time of attempting to make it appear the pressure to make a supply deal from the media will result in major oil competitors complying, is countermanded by the actions being taken by Iraq and others.

Iran is going to add at least 500,000 barrels per day to the market in the near future, and it looks much worse than the oil bulls are trying to convey. Before Iran had sanctions placed against it, it was producing about 2 million more barrels per day than it was right after sanctions were lifted.

Conclusion

This isn't just about Iraq adding some more supply to the market, it's a direct contradiction to the narrative attempting to gain traction, which would result in the oil market rebalancing as it has in the past.

For several reasons Russia has no incentive to come to the table, including it is probably slightly reducing production because of market conditions. What reason would it have to agree to further cuts to prop up OPEC? It wouldn't make sense. This is on top of it being far more difficult to reduce production in its Arctic regions, where it takes longer to shut it down and open it back up. Would OPEC wait on the sidelines if Russia were to agree to those terms once the market rebalanced? We know they wouldn't.

U.S. shale companies have also been slowly cutting production, with that inevitably picking up some in 2016. I'm not convinced yet cuts will be as deep as some are thinking, but there will be cuts.

All of that is to say, OPEC can't even pull together in its own ranks. Who would trust any agreement when each competitor is looking after its own self-interests, at the expense of any of the others. It's everyone for themselves right now, and no company or country would enter into negotiations with the Balkanized cartel.

Iraq's increase in supply confirms this is where OPEC and the oil industry is at, and there is nothing to suggest it will change in 2016.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.