In trying to judge the trajectory of oil prices -- and therefore oil stocks -- it helps to correctly predict where oil production for U.S. producers, and OPEC producers, will be in 2016. But doing that takes a bit of black magic.
I've spent lots of time talking about U.S. producers, and my belief that Energy Information Administration (EIA) projections are woefully underestimating the contraction that will take place in 2016. But what about the big OPEC producers? There, we'll also need to apply some black art to figure out what's really going to happen.
Why is it so tough for anyone to get a solid outlook on oil supply, both here and overseas? Well, in the U.S. -- where public companies vie for credit, cajole analysts and shareholders and battle with bondholders -- there is a not-so-subtle game of keeping lots of in-house information to oneself. Spends could increase or decrease depending not just on market conditions, but also on unknown reactions from funding bankers. Core wells could be put off development, or rushed, if some 'good news' is quickly needed. And, mostly, it's tough because U.S. companies like to put the very best spin on public presentations and quarterly reports, with production figures that will almost always presume the best case scenario. Their hopes don't always turn out to be right.
Inside OPEC, where most oil production is state-run, different hurdles to transparency exist. One is the misinformation that most oil ministries constantly provide -- most OPEC governments are under no obligation to provide honest assessments of their oil potential and projections, and don't. The other is the also the corruption that infests many of these agencies -- the international oil game often involves kickbacks, preferential bidding setups and nepotism.
That's why I take today's statement by the Iranian oil minister with a heavy grain of salt. As Iran begins today under the terms of the new (disastrous) nuclear agreement, Iran's oil industry prepares for a new international influx of oil investment and, they hope, much-increased oil production and revenues. So far, recognized production in Iran has hovered just above 3 million barrels a day, but they currently have potential production of more than 5 million barrels a day. The question is whether we will see that kind of improvement from Iran after the lifting of sanctions.
Here's where the black art starts to come in. While most analysts see the relief of sanctions as a floodgate opening, I see it as a trickle, at least to start. Iran has made clear that they are not interested in any foreign partnership on oil revenue, meaning that Exxon Mobil (XOM), BP (BP) and Total (TOT) can forget about adding their expertise for a percentage of the new production -- the traditional arrangement that most of the oil companies crave. While it won't stop the majors from increasing their presence in Iran, fees alone are not enough to move them into hyperdrive -- and Iranian production will not increase that rapidly. I can see Iran upping exports perhaps another 300,000 barrels a day in 2016: a significant increase for Iran, but not for the global market.
In addition, it is my belief that Saudi Arabia is near, if not at, its production limits -- pushing the rudder full speed ahead to wash away production competition as fast as it is able. Combined, the two powerhouses of OPEC production, I believe, won't come close to making up for the production declines that will be seen in the U.S. and elsewhere in 2016.
OPEC crude is certainly cheaper to produce and not as burdened by low prices. But for varying reasons, including a lack of modern technology, corruption and an understandable reticence in partnering on their growing production potential, the speed of growth inside OPEC will still remain very slow.
The timetable for a rebalancing of the global oil markets that I have predicted through the second half of 2016 remains unchanged.
Or, at least, that is what my skills in the black arts are telling me.