Market Sentiment Watch: No cut by OPEC, analysts, reporters, traders disappointed. Please see our notes from the conference below as there is going to be a lot of press spin on this and not everything was negative. In today’s post please find the natural gas and inventory reviews and notes and thoughts from the OPEC meeting. It’s going to be an ugly open and we plan on doing some shopping at lower E&P prices but likely not until next week. In our view, we’d rather let oil find a new comfortable trading range before attempting to catch falling knives in good or riskier names. It will be interesting to see if the gassy names see any interest now that OPEC is out of the way (lower oil prices are good for them in some ways). Likely on this shortened session we don’t see a lot of discriminating among E&Ps however. All eyes will be on crude, looking for the reversal of the now 4 month plus long trade against crude to occur.
Ecodata Watch:
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Oil Inventory Preview
- Natural Gas Inventory Preview
- Stuff We Care About Today – OPEC
- Odds & Ends
Please click the link right below this toHoldings Watch:
ZMT (Zman Medium Term portfolio):
Yesterday’s Trades: None
ZLT (Zman Long Term portfolio)
Yesterday’s Trades: None
The Blotter is updated.
Commodity Watch:
Crude oil fell $0.40 to close at $73.69 on Wednesday but is trading off $4.50 this morning at $69 after OPEC’s decision not to cut it’s 30 MM bopd official quota (after falling to as low as $67.75 overnight). This is is the expected test of $70 on OPEC inaction on the quota front. Everyone seemed to expect no cut but actually hearing no cut and an oft repeated comment that OPEc will produce 30 MM/d next year is prompting a break down in Brent and WTI and global prices in general to fresh four year lows. Would also not be surprised to see a near term key reversal day (ugly red open, green close) as the move is really just extending prices lower after a rapid and significant down draft in the face of no meaningful fundamental shift since summer. Please see our comments below in the Stuff section.
Oil Inventory Review
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Natural gas closed off five cents at $4.36 on Wednesday as it yoyo’d about before and after the record withdrawal announced a day early due to the holiday. The massive 162 Bcf withdrawal provides a better than expected early salvo in the withdrawal season, something traders will like to see as it provides cover relative to ongoing new record high lower 48 production levels. This morning gas is trading a dime plus.
Natural Gas Storage Review
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Stuff We Care About Today
OPEC notes from yesterday’s meeting – augmented where noted.
OPEC Watch: The Opening Address with ZComments as noted in ():
- OPEC said they spoke of improving stability at the last meeting 5 months ago,
- Economic recovery has continued to improve since then
- OPEC sees 3.2% growth in 2014 (global GDP), sees 3.6% growth in 2015. This is verbatim from the November OPEC monthly,
- OPEC sees 1.1 mm bopd growth to 92.3 mm bopd in 2015 (also unchanged from recent guidance)
- Demand growth mostly from non-OECD countries (this has been the case for quite some time now with no expectation of significant growth from US and Europe),
- OPEC sees non OPEC supply up 1.4 mm bopd in 2015, mostly from North America, some Brazil,
- Oil pricing has changed in last few months, after having been stable for 3.5 years (no kidding)
- The fall in prices may not be completely attributed to oil market fundamentals; stronger dollar and economic uncertainty and speculators have played a roll
- If negative price path continues expansion plans may be put at risk,
- Pricing action suggests market is searching for stability and balance.
- Discussions will focus on balance, looking for the good for consumers and producers alike (boiler plate comment)
- OPEC encouraged by talks with non OPEC producers and agencies like IEA (they later said it’s not about cooperation).
OPEC Watch 2: Closing Address
- Stable oil prices that didn’t affect growth projects and were good for producers is what is being sought (key message, don’t panic)
- Maintaining the 30 mm bopd output level (same level they have had since December 2011)
- Will continue to closely monitor developments in supply and demand (at the current Strip, demand should rise above current estimates)
- Next meeting June 5, 2015 (as expected, not projecting any sense of urgency on prices)
OPEC Watch 3: Post meeting Q&A
- Q) Reuters – are your members pleased with the agreement and do you see members complying?
- A) Ministers are happy. I’m sure members will comply. Debated prices and fundamentals for 2 to 3 hours. Result of that debate was to say at 30 mm bopd
- Q) Are you happy to let prices drift lower to protect share, is that the signal you are sending?
- A) We don’t want to panic, we’re not sending a signal, prices have been good for a long time, decline of the price does not reflect the fundamentals, again not sending a signal, we have no target price, just a fair price. (I think they are putting a little doubt into NAM capex plans but also not seeing as big a gap next year now as their “Call on OPEC” numbers indicate).
- Q) cooperation with non-OPEC and Russia in particular?
- A) we compare our numbers with them but have no cooperation. (that answer will be seen as a disappointment, especially as it pertains to Russia
- Q) Asked to talk about production specifically in the first half of 2015.
- A) “We cannot produce 30 mm bopd” – this is the cut. ZComment: Quota cut no, coming production cut yes. They act to balance markets and will do so, as usual in light of seasonal concerns.
OPEC Watch 4: More ZComments.
- This is not the end of the world. We would have preferred to see a quota reduction to 29.2 to 29.5 mm bopd (to get close to the “Call” on OPEC, but as noted in the post, individual member country allocations are no longer in play, not since 2006, and as noted a number of times, Saudi sees no reason to be the offset valve at the quota level to non-OPEC supply growth.
- However, a small change would have been doable as evidenced by comments from some players pre meeting. I do not buy the argument being made by some that OPEC has lost control of its members or that it has lost power in the market place. They are a third of the market.
- We continue to see OPEC as managing production through the seasonal demand dip of 1H15 to ensure balance. OPEC is not dumb. They have a good grasp of this (and graph of it).
- While a 0.5 mm bopd cut may have soothed markets it would not have been enough, by itself, to balance markets in 2015. A bigger cut however might have signaled panic, as was the case in how the market took the 4.8 mm bopd in 4Q08.
- We see more upside than downside from a mid $70’s price level, let alone the sub $70 level WTI traded to just after the meeting. Said that before the meeting and still see that.
- This is not my first rodeo. Recall we had prices trailing lower into YE2014 in a post here at the end of YE2013. Please take a look at it. We’ll have a version out for 2015 close to the end of the year. We do expect lower prices to increase demand. We do expect lower prices to prompt lower spending in the U.S. and to reduce U.S. production growth (see note above in the oil production section of the Oil Inventory slide show – it still will grow but less than expected in estimates currently describing the Call on OPEC).
- When items from the preceding bullet point become plain we expect a modest rebound in prices, the magnitude of which will in large part depend on the moves by US E&P to trim spending/rigs and by the improved global economy on lower energy prices.
- Our near term sense is that 4Q will end in the $70’s not the $60s but near term price projections are not generally our thing. We see 2015 pricing as likely rising as the year progresses as the market takes into account OPEC production cuts that will occur in 1H15.
Odds & Ends
Analyst Watch:
No stock specific comments that we see.
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