Mark on OPEC in the Wiggin Sessions

Freedom Financial Archive | Originally posted Nov 25, 2022
  • Continuing from Wednesday’s Freedom Financial Daily, I’m talking with Addison Wiggin.
  • Today’s snippet will be about OPEC, oil, and production cuts.
  • The energy world isn’t what it seems; we must look beyond the headlines.

On OPEC, Diesel, and Production Cuts

Addison: Let me get started by just reading some of these headlines that we collected.

Oil prices plunge.

OPEC is opening the production lines again.

Crude prices hit a 10-month low because there's now more product on the market.

Saudi Arabia and other OPEC members reportedly discussing production increases again in January, and OPEC is reportedly considering an increase of up to half a million barrels.

So that's like an opening salvo of headlines that lead us into the discussion about the energy crisis that we're expecting as things get colder.

Mark: For fun, and for those that can remember as far back as 2014 – 2015, these are the tape bombs that we all know and love, where Saudi or someone will test the market with some leak.

“Let's see how the market reacts to that.”

If you want to get a bit cynical, you can say that somebody had to clean up an order and they wanted to push down the market a little bit before they could fill it.

When you look at the underlying market in general, let's look at the two sides to it.

So first they announced a 2 million barrel a day cut. But we know that just based on the math behind it, it was really something closer to 250,000 to 270,000 barrels.


Because West Africa was already well below their allotments. Russia was already well below. Other parts of the Middle East were already below or right at where the new number was going to be.

And then you have Libya, Venezuela, and Iran, which are excluded from the agreement.

So, when you look at it, Iraq already told you they're not cutting, the UAE already told you they're not cutting.

So that falls to Saudi Arabia and Kuwait to take the lion’s share of that cut.

And the cut ends up being about 250,000 barrels.

Now you take that to the next side, and you look at it's like, okay, now they talk about increasing production by 500,000 barrels.

Well, there's over 40 million barrels that are still trying to find a home because there's floating storage that's excessive in the Middle East.

There's a floating storage that's excessive in West Africa. You're struggling to clear crude because your biggest buyers right now have essentially gotten everything that they need through year end.

So, they're just trying to play with the market right now. And then to complicate this one step further, there's a crude grade problem. 

Not every type of oil creates the same refined product.

This leads to some other conversations that we could have around distillate, diesel, and heating oil. But right now, there is not enough distillate heavy crude.

The oil that you make all your diesel and heating oil with, there's the lighter sweet stuff which comes out of the US shale is good for gasoline and the light end.

So, they could also announce this increase, which would open the ability to produce more distillate heavy volumes, which they could then sell at a premium.

Because when you look at the market, there's a big bifurcation with lighter crude gasoline, heavy crude trading at a steep discount, and the distillate heavy crude, which is trading at a steep premium.

So, they could look at this and say, well, why am I not going to go get that premium if it's available to me?

And that could also be one of those reasons. But they like to test the market first to see how it reacts. And we saw how it reacted.

Addison: So, when they announced the cut in the first place, I was curious about the politics of it. And the mainstream press doesn't do a good job of understanding that.

So as a trader, especially in the energy sector, what was the motive behind cutting production? That was like, what, six weeks ago maybe?

Mark: Yeah. So, it was just a matter of, let's call it a shot across the bow.

We can always cut production because it was a big splashy number. It was 2 million.

But for anybody that looked at the data, you're like, “Even if you cut Nigeria, Angola, Gabon, they're so far below that you'd have to cut another 2 million to even start to move towards their allotment.” 

You look at the Congo, something similar.

So, when you look at these numbers, it was essentially a mark to market of where their production is. 

Now there's two sides to that coin as well.

Because there are some will say, “Well, Nigeria can't increase their crude production.”

There's a production problem. But then the other side of it is, well, they have the most floating storage they've ever had.

They’re struggling to sell their volumes monthly. More and more keeps getting pushed to the next month.

So, you're like, “Well, if I can't sell what's in the market right now, why am I increasing production?”

And then you could say, well, it's because of Russia, it's because of all these shifts.

But there's also that little piece of the macroeconomic universe of slowing infrastructure spending, slowing manufacturing, slowing things along those lines that continue to create a problem around underlying oil demand.

So again, those are some key pieces that you must look at when we're talking about some of these numbers.

But it was splashy.

It sounded good, but realistically it didn't move the market.

Addison: Okay. And then you're saying that something that's just on people's mind is gas prices that they put in their car, that's an issue even going into the heating season. Do these increases in output change gas prices at all?

Mark: So, the gasoline price is an interesting one because there's two dynamics within that.

You have slowing demands.

So, if we look at Target, which gave weaker guidance, you look at Amazon laying off individuals, FedEx something similar.

Maersk is cutting their expectations for 2022 trade by 2% to 4%, and that doesn't include what they see as a decline in 2023.

Then you look at the trucking data, which is at the multi-cycle low and back to the doldrums of 2019.

The consumer's struggling.

So, when you take all of that together, you start to see the consumer getting stretched.

So, you're starting to see that demand soften, but you're not seeing a huge build in gasoline in specific regions.

But we're not importing the same amount we normally import from Europe because diesel is so expensive, and shipping is so expensive.

So, if I'm a refiner, why am I going to import gasoline when I can take this boat and I can export diesel into a very healthy market?

So, suddenly you have this gasoline conundrum where Europe has the most gasoline ever, seasonally adjusted, in its history, it's above 2020 in terms of where they are right now.

The same could be said for Singapore, a bellwether for Asia, while the East Coast is about 19 million below normal.

So, you're like, whoa, why is nobody closing that gap?

And it's because it's so expensive to ship right now.

The arbitrage of moving gasoline is closed, which is keeping prices higher than it really should be right now.

But as you see the seasonality kick in when you make diesel, you inherently make gasoline that will start to fill the coffers a bit more and that will help bring prices down a bit.

But you're still not going to see a huge drop because refiners need a margin. Without gasoline prices elevated, they're going to have economic run cuts, which we think is a big risk going into next year when you look at Asia.

I hope you enjoyed that preview of my conversation with Addison Wiggin over on his Wiggin Sessions.

And I hope you’re enjoying your well-deserved Thanksgiving weekend!

All the best,

Freedom Financial News