News from OPEC Meeting Not Positive Enough
Crude price volatility driven by the much anticipated OPEC meeting continued. During May we experienced seven trading days with moves of +/- 2.0% or more (1/3 of all the trading days for the month). We saw some technical factors and trading at play leading up to the meeting driven by commentary from key OPEC players. On May 25th OPEC and several non-OPEC countries agreed to extend their 1.8Mbpd production cut for nine more months in an attempt to accelerate rebalancing of the oil market. The initial agreement was due to expire on June 30, 2017 but this deal extends cuts until March 31th, 2018. The 172nd OPEC meeting ended up being drama-free as the cut extension had largely been announced by Russia and Saudi Arabia in Beijing a week prior. Market participants who were hoping for more were disappointed and it was reflected in next day’s trading with crude down 4.8%.
While OPEC was busy making headline news for most of the month weekly crude domestic storage figures were constructive. We had four consecutive weeks of draw-downs announced in May, with the magnitude of draws coming in well above expectations. In aggregate, May reported a 17.9 million barrel draw-down compared to estimates calling for a 9.7 million barrel draw. Continued draws throughout the summer driving season would provide a bullish data point for crude prices.
Downbeat Sentiment in Orlando
At the end of May the CCC research team participated in the annual MLPA conference in Orlando, an ideal setting to gauge investor and management sentiment. In a vacuum, if we would have known that (i) rigs would be up +100% since the May 2016 trough, (ii) capital markets (equity and debt) would be strong, (iii) interest rates would remain low, and (iv) production estimates, especially for the Permian, would continue to increase we would have thought that investor sentiment would be very strong. However, overall sentiment in Orlando was somber as equity performance continues to frustrate investors and management teams alike. Fingers have been pointed to the lack of fund flows above and beyond new equity being issued as one of the main drivers for this lackluster performance. What attracts the incremental buyer back into the space?
There are several factors that could alleviate the lack of flows, but all of them will likely take some time play out. (i) The easiest answer seems to be a rise in crude oil prices given the high correlation between the AMZ and WTI over the last couple of years. This would certainly get generalist and retail investors more comfortable. (ii) The big volume ramp up we are all expecting in 2H’17 could be a catalyst for the midstream sector, not necessarily for crude prices. (iii) Consolidation continues to be on investors’ minds, but we think a wide bid-ask spread remains a headwind. We will continue to keep a close eye on all these and how they develop.
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