Nitesh Shah

Director Commodity Strategist

Maxwell Gold
Director - Investment Strategy

ETF Securities Outlook April 2017

Little honor among OPEC cartel members

Summary
Although individual OPEC (Organization of the Petroleum are doing well, and have cut production close to target. Some
Exporting Countries) countries involved in the deal to cut countries have even cut more than they are required to, based on
production are close to compliance, as a group, the cartel is the data from secondary sources.
only 83% of the way to cutting 1.2million barrels.
Compliance in current deal
Extending the deal looks difficult given that participating non-
12,000
OPEC countries are doing far worse on compliance and want Target production 1 01%
more time to assess market conditions. 10,000 Actual production (March 2017)
Compliance level in % above bar
Cutting output has offered market share to the US. It is 8,000
difficult to believe that OPEC will want to continue to lose Thousand barrels
6,000
market share unless prices significantly recover. Rising US 99%
production keeps a lid on prices. 4,000
1 00%

1 00% 99%
1 00%
2,000 1 04%
OPECs poor history of compliance 9 8%
99%
97 %
1 01%

0
In November 2016, OPEC stole the headlines with a deal to cut
Angola

Qatar
Ecuador

Iran

Iraq

Kuwait

UAE

Venezuela
Gabon
Algeria

Saudi
output by 1.2million barrels compared to October levels. The cartel
abandoned its prior 2 year-strategy of maximizing market share. Source: Based on secondary communication, ETF Securities. Data as of 3/31 /17.

Moreover, the group managed to convince some non-OPEC

members to participate in the effort to cut back. However, the
An illusion
group has had a poor history of compliance with quotas and we
question whether this time will be any different. However, the OPEC deal was sold as a 1.2million barrel cut in
production from the cartel. The cartel has not cut anywhere near as
OPEC: Actual production vs quota much. The reason is that a number of countries are exempt from
34000
the deal including Libya and Nigeria. Iran was allowed to increase
Production production by 90,000 barrels (although curiously in OPECs
32000 Quota announcement its target level was lower than what it was
producing in October). Angolas reference value was set at
30000
September levels rather than October levels. Saudi Arabias
Thousand barrels

28000 reference value was set at a level that was above what was printed
in the OPEC November Monthly Oil Market Report (presumably,
26000
the figures were revised after the quota-setting meeting).
24000 Indonesia, which produces around 750,000 barrels a day,
suspended its membership around the time of the deal and so it
22000
became free to increase its production.
20000 Production cuts from OPEC (excluding Indonesia) have only
1998 1999 2001 2002 2003 2005 2006 2007 2009 2010 2011 2013 2014
Source: Bloomberg, ETF Securities. Chart data from 07 /31/98 to 1 1/30/14
amounted to 1.0 million barrels by March 2017, not 1.2 million
barrels. Therefore, the group is only 86% compliant.

Individual level compliance appears good

OPEC direct vs secondary communication
In the current OPEC deal, most member countries are allocated an
The deal had been calibrated based on secondary source
individual level quota. Of those countries that have a quota, most
information to set the reference values. In addition, these
1
Past performance is no guarantee of future results.
secondary sources are used for monitoring purposes. These Change in Saudi Arabian production by month
secondary sources include the International Energy Agency, S&P
(Thousand Barrels) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Global Platts, Argus Media, U.S. Energy Information
Administration, and Petroleum Intelligence Weekly. OPEC also 2017 -582 71 70

reports what its own members think they are producing. However, 2016 49 0 -10 10 59 205 181 -19 -38 -19 -47 -47

this data is incomplete as it excludes Libya and Gabon. Looking at 5-year average -16 -9 75 73 89 118 138 -31 -45 -23 -75 -128
the discrepancies between this direct communication and Source: Bloombergs OPEC production estimates, ETF Securities. Data as of 23 March 2017

secondary sources over the past year reveals that there are
consistent biases. Most OPEC countries believe they are producing Non-OPEC members
more than secondary sources report i.e. they themselves dont
While several members of OPEC tout strong individual level of
believe that output is as low as reported by secondary sources.
compliance, non-OPEC members who are participant to the deal
Direct vs. secondary discrepancy have not done so well. The deal was supposed to be revolutionary
500 because of the participation of non-OPEC countries, but it looks
<----Direct<secondary Direct>secondary ---->

400 like OPEC is doing most of the heavy lifting. The largest non-OPEC
300 member, Russia, has cut production only by 185,000 barrels
200 according to Russias Energy Minister Alexander Novak in an
Thousand barrels

100
interview with Bloomberg on Saturday 25th March. That compares
0
to 300,000 barrels it signed up to. At the most recent Joint
-100
OPEC/Non-OPEC Ministerial Monitoring Committee (JMMC) in
-200
Kuwait, the committee announced that the OPEC and participating
-300
non-OPEC countries achieved a conformity level of 94% in
-400
Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Jan 17 February. Once again we believe this figure fails to incorporate the
Algeria Angola Ecuador Gabon Indonesia
rising output from OPEC countries with an exemption.
Iran Iraq Kuwait Libya Nigeria
Qatar Saudi UAE Venezuela
Source: OPEC, ETF Securities. Chart data from 02/01/16 to 03 /31/17
Data represents production estimate from direct communication less production estimate from secondary sources
Deal extension?
While Saudi Arabia has historically overestimated its production In recent weeks there has been a lot of talk about extending the deal
(relative to secondary sources), in two of past three months since beyond the initial six months. Saudi Arabia said that if OECD
the deal has started, it has underestimated production (relative to (Organization for Economic Co-operation and Development) oil
secondary sources). Saudi Arabia is keen to display very deep cuts inventories remains above the 5-year average it is willing to support
in output. It reported a production cut of 877,000 barrels in an extension. Another four members of OPEC were supposedly also
January 2017 versus October 2016. That compares to the deal supportive at the JMMC. Oman, a non-OPEC member was also
requirement to cut 486,000 barrels. supportive. However, Russia said it needs more time to assess the
market, inventories and production in the US and other non-OPEC
Saudi Arabia: direct vs secondary discrepancy
150
countries. This is likely to be the sticking point, judging by how
much market share the US has taken in recent months. US
<--- Direct<secondary Direct>secondary --->

100 production of shale oil can break-even at US$40/barrel (bbl) today,

compared to US$80/bbl three years ago. Rising US production will
50
Thousand Barrels

cap prices at around US$55/bbl and therefore reduce the

0 motivation for OPEC and non-OPEC producers to cut further.

-50
US Crude Oil Production
10000
-100
9000
-150
Thousands of barrels per day

Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17

8000
Source: OPEC, ETF Securities. Chart data from 02/01/16 to 03 /31/17
Data represents production estimate from direct communication less production estimate from secondary sources

7000

Defying seasonals 6000

Cutting back on production in January was relatively easy because 5000

production was not cut back as much as normal in the final five
months of 2016. Seasonal trends point to production increases over 4000
2010 2011 2012 2013 2014 2015 2016 2017
the next few months. Keeping production this low will have to work
Source: Bloomberg, ETF Securities. Chart data from 01/01/10 to 04/07/17.
against seasonal trends.

2
Past performance is no guarantee of future results.
Important Risks

The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of
future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would
be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Commodities generally are volatile and are not suitable for all investors.

Investing involves risk including loss of principal.

The Organization of Petroleum Exporting Countries (OPEC) is a group consisting of 12 of the world's major oil-exporting nations. OPEC was
founded in 1960 to coordinate the petroleum policies of its members, and to provide member states with technical and economic aid.
Maxwell Gold is a registered representative of ALPS Distributors, Inc.
ETF001153 04/30/18

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