Story of An Agreement

The OPEC + meeting finally took place Saturday afternoon and OPEC + has decided to maintain the cuts at 9.6 million barrels a day (Not 9.7 as Mexico decided to be out but MEXICO last month cut 230,000 barrels instead of 100,000). It looks like a life line sent to the USA but is it? The net cuts last month showed a 90% compliance as SAUDI was over 135% compliant, producing 7 million instead of 8 whereas Nigeria, Iraq, UAE and Angola altogether were exceeding the agreed production by 1 million barrels a day. In July, the Saudis should go back to 100% compliance hoping that the four other members will be which is far from being warranted. What is warranted is that Parsley, EOG,… are going to re open wells closed a month or so ago potentially adding 500,000 barrels at least to supply. This should not be seen as a revival of shale but a dead cat bounce. A typical shale well produces 80% of its reserves in the first six months which means that to survive and grow, the shale industry has to constantly drill wells, 14,000 last year. Whereas 6000 wells are necessary to maintain production requiring over 300 rigs, the number of wells to be drilled with today’s number of 200 rigs only does not fare good news for the future production that we believe will be down 40% by January 2021 versus 2020. Texas drilling permits were down 50% in May, 30% ytd and fracking teams are down to 80 from 400. The number of DUCs which was decreasing by 1000 a month has stayed stable since March at 7500. Drilled but Uncompleted wells, known as DUC are a cheap alternative to drill a new well and could be finished at a lesser cost. Scott Sheffield, Pioneer CEO thinks that shale production will be stuck at a low level up until WTI is stable above $55.

We talked to the Russian ministry of oil through JP Morgan last week, before the agreement. They saw a global demand trough of 25 million barrels a day in April, 20 in May and expect 13 in June with a supply disruption in June of 13.5 million barrels. Their best case scenario is a U shaped recovery of demand with a come back to the 5 Years inventory average by January 2021. The worst, taking into account a second wave of Covid in the fall and worsened China/USA relationships would delay the draw on inventories by one year. The current agreement is valid until April 2022 but the extensions of the cuts only by one month. At $40 Russia is balancing its fiscal budget but Saudi is not ($70). Ben Salman gives the impression of knee jerking to Trump, having changed its attitude 180 degrees since February. Trump seems to exert a huge pressure on the Kingdom which is facing potential social unrest and growing hostility from the Arab world. Both countries are looking actively at the number of US rigs and bankruptcies, Russia more than the other.

One factor which has to be taken into consideration is Libya’s situation with Khalifa Haftar ready to do a cease fire. The Sharara oil field which used to produce 300,000 barrels a day could reopen and the country which is exporting only 90,000 barrels a day vs 1.2 million last year could become a problem for OPEC+.

We expect the oil market to pause a little as new barrels come back… We still have a target far above $ 60 for the Brent in one year from now. In the meantime, bulk shipping is recovering … at last.

Whereas freight rates were up 17% last week for Newcasttlemaxes, the level of iron ore inventories is very low in China.

We expect Brazil to boost its exports to China which will be best for the ton mile equation of Dry Bulk.