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Page added on May 3, 2017
All Eyes On Saudi Arabia As OPEC Begins To Unravel
Has OPEC failed? That’s the question analysts have begun to ask, approaching the group’s next meeting later this month. When the members gather at their headquarters in Vienna, it will likely be to agree on an extension of production cuts in place since January.
Those cuts, originally intended to re-balance markets and boost prices, had an initial positive effect but their ultimate impact has been difficult to measure, as inventories have declined only gradually while global oil shipments have increased. New production from outside of OPEC, particularly in the United States, has kept global inventories high.
It’s generally believed that OPEC members will recognize the need to extend cuts, with one observer calling it a “100 percent” probability. There is some speculation that Russia, a non-OPEC state whose cooperation is crucial to the overall success of OPEC’s strategy, may prove intransigent when it comes to cutting more production, but that skepticism was partly assuaged last week when Russia’s government indicated their compliance had neared one hundred percent.
As far as major OPEC producers, such as Saudi Arabia, Iraq and Iran are concerned, an extension of the existing arrangement makes sense. Riyadh has been over-cutting and wants higher prices to support the partial IPO of Saudi Aramco next year. Iran and Iraq were both partly exempt from the production cuts, with Iran successfully recovering production to 3.8 million bpd.
While it’s unlikely Iran or Iraq would agree to reducing production, there’s little reason for them to protest an extension of the deal, especially when they’ve been able to seize market share from others, like Saudi Arabia, who have had to cut more. Fears that oil could plunge below $40 a barrel if no extension is agreed upon have begun to percolate, putting pressure on OPEC to deliver an extension at their May meeting.
It can’t be denied that OPEC’s removal of 1.2 million bpd, combined with Russian cuts, has had an impact on global supply and supported declines in inventory. It’s also evident that declining investment since the price crash in 2014 will likely translate into a much tighter supply situation in the future, an outcome that OPEC is undoubtedly counting on, considering some of its members (particularly the Gulf States) can increase production and take advantage of higher prices with relative ease.
But in the short-term, the OPEC deal hasn’t been the success story many hoped. American production, following a slump in 2016, has returned and shows few signs of slowing down, at least until the end of the year. Recovering production in U.S. shale has been supported by an increase in activity in the Gulf of Mexico, where offshore projects have started to come on-line. A federal administration with a boisterous, ambitious attitude regarding future energy production supports feelings that the future is bright for U.S. fossil fuels: executive orders on opening up offshore, approving long-dormant pipelines and freeing up federal land have only added to the air of confidence in the U.S. patch.
OPEC cut production, sure, but its strategy didn’t seem to cut into imports by OPEC customers, particularly China, which have increased despite alleged reductions in OPEC output. American imports of Saudi Arabian oil have also increased, while total imports from OPEC in the first quarter of 2017 rose in January, according to EIA data, followed by a decline in February. Saudi Aramco has offered discounts on products and crude headed for Asian markets, after further discounts were offered in April and May. The move is motivated not only by an interest in seizing more market share but also in improving the performance of Saudi Aramco, which faces its first partial IPO next year and is being dogged by skepticism surrounding the initial $2 trillion estimation of the company’s worth.
Crude shipments from OPEC members rose slightly once the cuts went into effect, indicating a certain disconnect between rhetoric and reality. Refiners in the West continue to take advantage of low crude prices and high refining margins to make a killing the short term. A big U.S. inventory draw did little to affect prices, which declined shortly thereafter on additional fears of a continued glut in supply.
Meanwhile, the U.S. rig count ticks steadily upward, fueling expectations that U.S. production will top levels last seen in 1970, the year American conventional crude production peaked. It’s no coincidence that 1970 is also when OPEC first truly began to throw its weight around the global petroleum market, and the year oil scholar MA Adelman noted oil prices began their “mutation” due to OPEC pressure on major companies.
It’s now fairly clear that an OPEC production cut extension will be reached this month. But the real question is whether a cut will prove OPEC’s viability in influencing major trends in the market. Its members have long been focused on their own domestic agendas, but 2017 could be the year the group’s unity starts to come undone. Saudi Arabia is focused on its IPO, Iran and Iraq on seizing market share and recovering production, while many other member states including Nigeria, Libya and Venezuela continue to struggle with immense challenges and instability. As American production recovers to a historic level, it’s possible that OPEC’s failure to act as a lever on price could auger a permanent decline in the group’s fortunes.
With doubts surfacing over whether the first round of cuts was a true success, all eyes will be on OPEC in the second half of this year, measuring whether the cartel that isn’t really a cartel still has the juice to deliver on its rhetoric.
By Gregory Brew for Oilprice.com
10 Comments on "All Eyes On Saudi Arabia As OPEC Begins To Unravel"
Rockman on Wed, 3rd May 2017 7:09 pm
I still feel there’s a tad of a credibility issues with exactly how much production was (or wasn’t) cut. There is no independent confirmation of their numbers. But even if correct reducing the amount of a commodity on the market doesn’t necessarily increase upward price pressure. As always it’s the oil buyers that set the price. OPEC may have cut production but if the buyers reduce demand at the same time then there’s little or no leverage to push prices up.
So the age old “chicken vs egg” question if the oil sellers actually are producing less: is production down as a result of a VOLUNTARY plan to reduce sales or are sales down because of a decrease in demand? If it’s the latter selling less oil for the same (or even lower) price would be the result.
And if OPEC is telling the truth isn’t that exactly the price activity we’re observing today? Otherwise how would one explain a reduction of a commodity on the market without a subsequent increase in price?
Easy answer IMHO: a decrease in demand. Which takes full circle back to how the dynamic has always worked: the amount of demand sets the price of oil and not the amount of oil produced. At least that’s how it worked since the Texas Rail Road Commission controlled the price of oil. Which is exactly why the world experienced stable oil prices between the 40’s and early 70’s like was never seen before or after.
Boat on Wed, 3rd May 2017 7:22 pm
Rock,
It is widely reported demand from 2016 to 2017 dropped from 1.6 Mbpd to 1.3. No reports so far have changed. OPEC/others simply should have targeted cuts to 2.5 Mbpd instead of 1.8. That amount of cuts would have dropped stored oil at a much faster rate and drove prices much higher and quicker.
Rockman on Thu, 4th May 2017 8:39 am
Boat – Tough to interpret US storage numbers this time of the year with the cyclic build for driving season. And then you have speculators selling out of storage when prices increase and adding when the get low enough.
bobinget on Thu, 4th May 2017 9:12 am
I still maintain, low oil prices are aimed at destabilizing Venezuela, Nigeria, and further plunge the ME into Chaos.
Here’s a view from one energy watcher;
Zero global interest rates mean there will ALWAYS be more money. Even if you bankrupt every single shale producer and equipment operator, that will simply transfer it all down to the new operator at near zero costs, lowering their break even.
At some oil price of course it will work. But anywhere near those oil prices the Saudi’s will be burning 25 billion a month.
Shipping some oil from storage to the US and being cute may end up costing the Saudis 20 or 30 billion dollars. Had they shipped 1 less ship per week for 8 weeks, just them nobody else changing, they’d have delayed making 800 million in revenue, but the oil price on their whole sales structure would be probably 10$ higher than right now.
Doomonyou
joe on Thu, 4th May 2017 9:14 am
Lets make it simple then so we get it. Peak oil implies limits to supply, so far we have an excess of supply, therefore the arse fell out of the price. North Sea oil is a bust, so UK inc needs to go it alone or become nothing but a bigger version of Ireland. Venezuela (founder of OPEC) cant keep the lights on because nobody wants their heavy oil cause oil is so cheap. Oil is litterally everywhere, from middle of the US to Arctic, so why is there a problem?
The problem is simple, oil is not the whole story. Oil is supplied to provide energy for something else, oil is the modern equivalent of the aquaducts or wheat from Egypt and Carthage. Oil is symptomatic of the slowing growth in the global economy started in 2007. As Rome fell apart because it was so successful, our society will do the same and we will leave behind far more evidence of the passing of the age of oil than any Romans did, sadly there may not be any people around to wonder about us……
bobinget on Thu, 4th May 2017 9:22 am
I’m finished predicting (oil prices).
Shorts, like our President, have no particular loyalty to any nationality or ideological mind set.
In this ‘post truth world’, shed old ways of thinking. Understand only two truths;
#1) Everything revolves around energy.
#2 Everything.
bobinget on Thu, 4th May 2017 9:50 am
Joe,
Asia is too growing, so there.
While DEMAND for oil may be said to be slowing, who ya gonna believe, Me or alternative facts?
Like Republican Health Care. If wealthy, you are guaranteed great health care.
IOW’S: Just because there’s barrels by the billions locked in shale and oil sands around the world, it’s gonna take trillions in new investments to extract.
Under $60 oil that ain’t happening. While some shale
operators might break-even @$40 investors can’t be fooled forever.
Next year the world will burn, Heaven Help Us, almost
98 million barrels per day. Refute that, Joe
https://www.eia.gov/outlooks/steo/report/global_oil.cfm
bobinget on Thu, 4th May 2017 11:14 am
Some may have noticed.
I omitted off-shore drilling, where the bulk of ‘new’ oil is found… or was.
A shale well turning in a thousand barrels per is cause for rejoicing. TakeThunderHorse:
Search Results
Thunder Horse Oil Field – Wikipedia
https://en.wikipedia.org/wiki/Thunder_Horse_Oil_Field
Jump to Thunder Horse platform – Thunder Horse PDQ is the largest moored semi-submersible production oil platform in the world, located in 1,920 …
Current production of oil: 250,000 barrels per … Offshore/onshore: Offshore
Estimated oil in place: 1,000 million barrels … Start of production: 2007 (30)
As it happens, most of the worlds drill ships are not operational.
Costs for ultra deep, not Arctic, mind, compare unfavorably with oil or tar sands if you will.
So if America’s president opens up deep drilling today,
few companies will jump at the chance to lose money at current prices. Oh, it took almost 10 years to get ThunderHorse on line.
Since 2015 when ultra deep drilling got hit upside the head by facts, deep water did not get shallower.
twocats on Thu, 4th May 2017 12:30 pm
I couldn’t find extremely convenient charts, but from what I can tell there isn’t a single OPEC country that has a fiscal-breakeven at below $50
https://twitter.com/georgikantchev/status/821395509701181441
which means every country continues to have deficit spending. And when you don’t print your own money and sell that around the world like the US does, deficits still matter.
Debt/GDP ratios have been rising across the world, including in OPEC especially since 2015. In addition, many countries financed themselves with oil as the form of repayment, which is a double whammy, and further limits how much production they can “cut back” in order to boost prices.
We are in the era of the “Everything Bubble” and the only focus many countries have at this point is to “not implode”. So no, they are not going to cut another collective 1 million bpd or whatever. That would be suicide for some. they will extend the cuts, shave national budgets where they can, take on more debt, and keep the bleeding to a minimum.
Global triage.
rockman on Sat, 6th May 2017 8:56 am
twocats – “there isn’t a single OPEC country that has a fiscal-breakeven at below $50 which means every country continues to have deficit spending.” If I read you correctly you’re may be saying it costs those countries $50+ per bbl to produce EXISTING WELLS. Granted most of those countries are not very transparent when it comes to such numbers but I can assure you that those LOE’s (Lease Operating Expenses) are well below $50/bbl.
Of course investing in new wells is a different matter. But even in that case there is never a go/no go number like “$50/bbl”. The will be wells worth investing in at $25/bbl and others that fail to meet the economic threshold at $90/bbl.
But I don’t think you’re referring to LOE. As far as deficit spending that’s also something of a floating proposition. There’s always a minimum amount of monies every OPEC country must spend. But beyond that the rest is discretionary. Looking back at the KSA its budgets were typically a function of it oil sales revenue. Which it ran huge surpluses when oil increased: it has put together budgets based upon lower income expectations. Conversely it increased budget projections based upon expectations of continued higher income.
And now with lower oil prices incomes fall short of budget plans. The question now becomes how much of its budget is mandatory and how much discretionary? Discretionary perhaps being new oil development projects that won’t be undertaken due to low oil prices.
After all the US has run huge deficits for the last decade or so and borrowed $TRILLIONS to meet budget ” requirements”. But we can argue all day about about how much of that deficit spending should not have happened.
Just as we might assume much (if not all) of any deficit of an OPEC country is discretionary.