What To Expect In The Oil Market After The Doha Meeting On April 17

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Oleh Kombaiev

Summary

Success in the Doha meeting on April 17 will only lead to a decreased level of the global overproduction in oil -- it will not eliminate it.

Overproduction in 2016 will be reduced to about 1.4. barrels per day.

There is a small probability that the possible reduction of oil production in the United States will compensate for the projected global oversupply.

Many are pinning their hopes regarding the possible rise in the world price of oil on the meeting of representatives of the leading oil-producing countries in Doha, scheduled for April 17. However, the consequence modeling of such an agreement for the global balance of oil supply and demand does not provide an opening for sustainable growth of rates.

It is expected that about 15 countries, together with Russia and OPEC members (accounting for 73% of total oil exports) will participate in the meeting. Let's try to predict the key parameters and results of the possible arrangement.

In March, crude oil production in Russia reached the level of 10.912 million barrels per day. That was even slightly higher than in January, with 10,910 million barrels per day. Thus, Russia eloquently defined the acceptable level, which it agreed to freeze.

Source: SAXO Group

I suggest skipping the topic of Iran and just agreeing that the country will not join this agreement, at least until oil production volume equals 4 million barrels per day. According to OPEC secondary sources, in December 2015 the production level amounted to 2.887 million barrels, and in February Iran was already producing 3.132 million barrels per day. The momentum is enough to approach the mark of 3.80 million barrels per day by the end of this year. By the way, this is consistent with the official plans of Iran.

At different times different sources and officials reported that Libya, Iraq, Kuwait and even Saudi Arabia will not join the agreement if Iran does not freeze production. I propose that these countries, as well as the other OPEC member countries (excluding Iran), will go for a bargain and agree to limit production at the maximum level achieved in 2016 -- i.e., to consider the optimal agreement alternative.

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So, based on stated assumptions and the latest official OPEC forecasts about the structure of global oil demand and supply, we get the following oil supply demand structure in 2016:

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As you can see, the global overproduction of oil after the probable signing of an agreement does not disappear, although it will decrease to 1.4 million barrels per day (in 2015, according to OPEC, the average overproduction amounted to 1.96 million barrels per day). The stocks will continue to grow, which will require new storage spaces.

So, after the eventual success in Doha on April 17, the "ball in the oil game" will move toward the field of the United States. Though I'm not sure that the production in the United States can drop at least by 1 million barrels per day in 2016.

The number of active drilling rigs in the United States has decreased by 55% over the past year -- from 988 to 443. Theoretically, this should affect the production level within the country. In practice, this does not happen. According to the latest EIA data, oil production in the United States amounts to 9.008 million barrels per day -- i.e., the overall production is now practically at the level of September 2015.

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Source: OPEC

This is because oil companies at the end of their drilling mothball the drilling rigs and pump the oil at the existing fields with greater results. The capacity of one rig for the last eight years has grown by an average of 600%, and more than by 30% over 2015.

Moreover, the production on the closed drilling rigs is only mothballed and with a corresponding rise in prices it can be resumed relatively quickly. In 2014, the average break-even price of shale oil extraction in the United States was estimated to be about $50-$60. But the companies worked to improve the profitability of this type of production, and already by today the break-even point could fall to the level of $45 per barrel and below. And it makes any price rally above this price level impossible.

Conclusion

In my opinion, the probable signing of the agreement in Doha on April 17 will confirm that the price of oil has passed the bottom. However, signs of the return of the bull market will not be seen until United States production is reduced by at least 1 million barrels per day, in order to minimize the redundant global oil production. However, given the resistance of U.S. manufacturers, this is not a likely prospect for 2016. It should also be noted that on April 17 the fixation of the oil production level will be discussed, and not its export. Hence, the accumulated oil reserves in storage will prevent the substantial growth of oil prices.

Note: Unless otherwise stated, all charts included are my own.

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.