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Page added on February 29, 2016

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OPEC boxes itself into a corner

Public Policy

Heavyweight oil producer group OPEC stepped into the ring with young upstart US shale back in November 2014 and delivered its best shot. Led by prizefighter Saudi Arabia, it decided not to cut output in hopes of arresting the slide in prices, but, in an attempt to floor the relatively high-cost producer, declared it would defend its ground.

Fast forward 13 months and unconventional crude supply is down but not out. And OPEC, whose membership has been split down the middle by a policy aimed at clawing back market share from what has proved to be a resilient opponent, must be wondering whether it has all been worth it — especially after having read the International Energy Agency’s latest medium-term forecasts.

The IEA expects US light tight oil output to start recovering in 2018 after a 600,000 b/d decline in 2016 and a further 200,000 b/d drop next year. It sees US light tight oil reaching 5 million b/d by 2021, up from 4.23 million b/d in 2015 as oil prices recover and technology continues to improve.

Indeed, OPEC is now in a predicament of its own making. It and Saudi Arabia have regularly stipulated over the past 13 months that OPEC will not cut output unilaterally but is willing to work with independent producers towards a stable market. But no one has shown willing to cut production and the talk now is of an output freeze, as proposed by non-OPEC Russia, Saudi Arabia and two other OPEC members, Venezuela and Qatar.

OPEC Secretary General Abdalla el-Badri suggested in Houston last week that the proposed freeze could be a first step in the effort to deal with a global supply glut.

But Saudi Arabian oil minister Ali Naimi pretty much dismissed any potential for future output cuts, telling the same conference audience that a coordinated production cut would be essentially pointless.

“There is no sense in wasting our time seeking production cuts,” Naimi said, adding that OPEC and non-OPEC producers would likely “not deliver” if asked to cut production.

Naimi was confident that major producers would join a pact to freeze production at January levels.

US shale producers having their “Rocky” moment

But, understandably, there is some disgruntlement within OPEC’s ranks about the mechanics of a freeze, which would see producers hold output at the January level. This would mean Saudi Arabia continuing to pump in excess of 10 million b/d and Russia at the all-time high of 10.88 million b/d.

Not surprisingly, Iran is unwilling to play ball, with oil minister Bijan Zanganeh last week saying it was “a joke” that countries pumping more than10 million b/d should expect Iran to freeze its production at the low level imposed by the sanctions.

But OPEC’s challenges don’t just lie in breaking the impasse and getting its own members and non-OPEC producers on board. They lie with the fact that any agreement — whether a freeze or an output cut — may not have the desired longer-term outcome, because restraining supply could allow shale producers to ramp up production and offset any supply cap.

This risk was highlighted by the IEA: “While oil prices should start to rise gradually once the market begins rebalancing, the availability of resources that can be easily and quickly tapped will limit the scope of rallies – at least in the near term.”

Oil companies have become far more efficient in fracking unconventional wells over the last decade and should continue to raise productivity, but probably need prices quite a bit higher than $30 a barrel to boost activity, shale experts have said.

The IEA sees the supply glut continuing into 2017, heaping more pain onto crude producers on both sides of this battle.

There is unlikely to be any clear winner from ongoing low prices, which have been bobbing along close to 12-year lows.

But did OPEC have a real alternative to its market share policy? Possibly not. And with no sign of a coordinated pact among producers to reduce production, leaving the business of supply management to market may still be the only realistic option — even if that means continuing and deepening pain for the oil producing community as a whole.

Also, does OPEC have the resolve? For OPEC, read Saudi Arabia, and, to judge from Naimi’s remarks in Houston last week, there is no sign that the kingdom is for turning. Indeed, Naimi said Riyadh could survive $20/barrel oil. In December 2014, he said OPEC would not cut, even if prices went to $20/b.
As the great US baseball player Yogi Berra once said, it’s déjà vu all over again. — Paul Hickin in London

Platts



39 Comments on "OPEC boxes itself into a corner"

  1. Davy on Mon, 29th Feb 2016 6:46 am 

    “This risk was highlighted by the IEA: “While oil prices should start to rise gradually once the market begins rebalancing….” “SHOULD” is not a scientific principal. The IEA “SHOULD” is really nothing more than the attitude that what happened in the past will happen again as if human economics is scientific truth. Rebalanced markets because of supply and demand does not have to happen with prices rising they could be dropping also.

    There is no mention that an earlier supply and demand economic range may have already broke to a lower range and will never recover to previous levels. Absolute quantities do not matter here it is the combinations that yield healthy economics. We probably hit peak oil around now because we hit a combination of peak supply and peak demand.

    The peak supply was oil that is affordable per the diverse requirements of the global economy. For some that means covering government budgets. For others it means market fundamentals of return on investment. For the global system as a whole it means high quality economic oil to power us through limits and diminishing returns that is approaching and or is here. The lack of this economic oil is causing the global system to degrade.

    The peak demand is really just the huge global deflationary debt overhang. We have large global macro unfunded liabilities of expectations both social and economic. Socially we have a growing population of peoples wanting a better life and not getting it. Financially we have markets that have valuations that have no relation to reality. We see markets with expectations of future growth and returns that are just not real. In other words demand expectations are greatly inflated and the reality of demand is deflated.

    Real productive activity has been greatly reduced. We have huge malinvestment, unprofitable development, nonperforming financial activity, and overcapacity of production. All of this “non-growth” growth is overhanging our global system as debt. This is not debt daddy knew. This is debt that is up against limits and diminishing returns of debt itself. This is debt that has become a drag on growth by being bad debt.

    If you invest in something and it cost more to make than it gives you back you will go broke or starve if you are an animal. Society has gotten around this by various moral hazards of disregard for normal fundamentals of price discovery markets are so good at. Manipulation and corruption were used to obtain abstract results and now the system itself is systematically corrupted.

    This demand that IEA thinks will come back is likely over at the level that will rebalance the markets as was once the case. Supply is there but not profitable supply that powers the global economy. If we are in a macro demand destruction process the rebalance the IEA should talk about is an economics of descent where decay, dysfunction and abandonment are the market principals.

  2. rockman on Mon, 29th Feb 2016 6:51 am 

    So the EIA sees the US shale players increasing production by 2021 above the level they achieved when oil was $100+/bbl and there were 1,600+ rigs drilling. Has anyone bothered t see what the EIA projects the price of oil to be after 2018? Or the number of US rigs drilling? Or the cap3x spent by US shale players?

    A truly amazing prediction.

  3. marmico on Mon, 29th Feb 2016 7:39 am 

    100 U.S. natural gas rigs produce 2,226,967 million cubic feet per month.

    https://www.eia.gov/dnav/ng/hist/n9070us2m.htm

    Truly amazing.

    Bring on PCWD (Peak Chicken Wing Dynamics). 🙂

  4. JuanP on Mon, 29th Feb 2016 7:57 am 

    Western propaganda is so much better than non Western propaganda. Reading this piece I couldn’t but admire how well crafted it is. The Russians can’t lie like this, neither can the Asians or Africans. Western English language media are the best at lying, manipulating info, and distorting the truth, the rest don’t come even close.

  5. JuanP on Mon, 29th Feb 2016 8:03 am 

    The article contains old data regarding Russia’s newest post Soviet oil production record, according to this link, http://oilprice.com/Energy/Energy-General/Russian-Production-Is-At-A-Post-Soviet-High-Despite-Oil-Freeze.html

  6. JuanP on Mon, 29th Feb 2016 8:12 am 

    “according to calculations by Bloomberg’s Julian Lee, released moments ago, Russian crude and condensate production just set new post-Soviet daily record of 10.92mbpd”

    I am amazed the Russians have been able to increase production for so long. I think it would be in Russia’s best interest to stop exporting so much oil and gas and save most of it for future domestic consumption. Of course that will never happen because it makes too much sense and human beings don’t create institutions capable of making commonsensical decisions, so the Russian Federation’s government will never make that call.

  7. shortonoil on Mon, 29th Feb 2016 8:13 am 

    “There is no sense in wasting our time seeking production cuts,” Naimi said, adding that OPEC and non-OPEC producers would likely “not deliver” if asked to cut production.

    No one is going to cut because if they did they would end up with less revenue than they had before they cut. Naimi babbles on, and on, over and over again about no one wants to cut. No one is cutting because they can’t; it would merely move their upcoming insolvency to an earlier date. It is the one thing that no one in OPEC, or any where else wants to admit.

    No one wants to admit that the world of oil is not what it used to be, and never will be what it was again. Depletion has reduced oil’s ability to power economies, and as a result its price has gone down. “The price of oil depends on the strength of the economy, and the strength of the economy depends on oil’s ability to power it.” Reducing the supply of it, when it can no longer do what it previously did, is not going to solve the problem? Cutting production will only result in less oil, not more economy to provide a demand for it!

    This is the quagmire the oil industry now must deal with; they must keep producing to stay alive as long as possible, and at the same time hide their dilemma from the world. Blaming the other guy is almost working; shale is dying because the Saudis won’t cut, and Venezuela is dying because shale won’t die! It has become a multi $trillion circle jerk. But, beating up on a straw man has its limits; eventually he loses his stuffing.

    The world of oil is in serous trouble, and no one wants to admit it. The industry has been pumping the best it could find for the last 150 years, and now the best is not very good. As a matter of fact most of it is not worth pumping at all. It will never be able to sustain an economy that can supply a demand for it. In the mean time the Saudis will blame Shale, Shale will blame the Russians, and the Russians will tell stories about pumping oil out of the Arctic at $30/ barrel. No one is going to admit that it is over; because when they do – it will be over!

    http://www.thehillsgroup.org/

  8. onlooker on Mon, 29th Feb 2016 8:23 am 

    ““The price of oil depends on the strength of the economy, and the strength of the economy depends on oil’s ability to power it.” wow that it a simple yet revealing quote. So the interplay of the economy and oil are mutually reinforcing and interact. So now we have a weak general economy and a weak oil sector. Together they will further amplify the Great Contraction.

  9. paulo1 on Mon, 29th Feb 2016 8:38 am 

    A new contender and a relatively unknown new arrival to the boxing scene dubbed LTO stepped into the oil ring last year with Satus Quo, a venerable and wealthy energy veteren. The bout was absolutely sensational, and indicates the failings of both fighters.

    At the bell, LTO immediately demonstrated superb conditioning and technique which is only found in the highest priced training regimens. Wading into his opponent, LTO immediately ramped up his attack and gave it all he had. It looked to all viewers like he was aiming for an early round knock out and a newly minted crown. Not to be, the fight put on by Status Quo was reminiscent of Muhammed Ali’s ‘rope a’ dope’ used against George (Invent Help) Foreman in Rumble in the Jungle. In this case, the fight jungle is the world stage of energy production, a venue requiring more than high-priced trainers,fancy techniques, and deep-pocket financing. One celebrity of the sport scene was heard to shout as round one ended, “Holy Frack, did you fracking see that? LTO is going to kick the living shit out of Satus Quo”!!!!!

    The slug fest went only 3 rounds, and finally finished off in 2016. The brutal fight appeared to wound both fighters with LTO having to recuperate in hospital (at huge finacial cost)for many years. Staus Quo has aged, and now appears too spent to ever fight again.

    Deepwater has refused to fight either fighter in any future bout.

    Widely condemned as a brutal and offensive industry favouring only a selected few, it now appears that any future energy fights may be further shunned by world-wide viewers as they search for a new form of purpose and entertainment. A new set of sun-based and wind driven sports are highly touted by the rich set, with Bill Gates funding an entirely new league for the masses.

    Much to the chagrin of the unsuspecting pundits, it currently looks like Canada’s version of manly man ice hockey will soon sweep the World’s sporting stage as it is now posed to usurp not only the energy wars, but also the NBA, NFL, and Footie. This viewer can only say, “Thank fracking God. It’s about time the world came to its senses”.

  10. marmico on Mon, 29th Feb 2016 9:04 am 

    Paulo. You don’t get it.

    Your vice is someone’s else virtue.

    Your discretionary expenditure is someone’s else necessary expenditure.

    You are the perfect example of a flabby six pack abdomen. A concussed totalitarian.

  11. shortonoil on Mon, 29th Feb 2016 9:18 am 

    “So the interplay of the economy and oil are mutually reinforcing and interact.”

    “The price of oil depends on the strength of the economy, and the strength of the economy depends on oil’s ability to power it.”

    As exceptionally simple as it is, it is the one statement that you will not hear from the petroleum world. It foretells of their ultimate conclusion; its reality produces terror for those who are attempting to exist in perpetual denial.

  12. marmico on Mon, 29th Feb 2016 9:28 am 

    “The price of oil depends on the strength of the economy, and the strength of the economy depends on oil’s ability to power it.”

    What a crock of shit. If only the $29.99 blue light special ETP fuctards understood energy/GDP intensity.

    http://www.eia.gov/totalenergy/data/monthly/pdf/sec1_16.pdf

  13. shortonoil on Mon, 29th Feb 2016 10:05 am 

    Of course, it is the strength of the economy on Mars that dictates the price of oil. Your trolling is getting stupider and stupider. You really are a moronic troglodyte with the mental capacity of a Neolithic goat herder.

    “The price of oil depends on the strength of the economy, and the strength of the economy depends on oil’s ability to power it.”

    . .
    .

    Here are some dots – now shut up and try to connect them?

  14. marmico on Mon, 29th Feb 2016 10:30 am 

    You forgot to end your post with the usual blue light special, fuctard.

    Bedford W. Hill, sole proprietor, of the eponymous Hill’s Group, who empirically falsified his ETP model in his own words.

    You and innumerate Davy Greenacres should get along just fine taking turns sodomizing goats.

  15. Davy on Mon, 29th Feb 2016 12:30 pm 

    Marmi, I raise black angus cattle too. The goats and cattle work as a grazing system each grazing a different spectrum of grasses, weeds, and brush.

    This comment is not to teach you about animal husbandry. This comment is for you to think about down the road when I am eating goat and you and yours are starving. Remember Davy Marmi.

  16. Practicalmaina on Mon, 29th Feb 2016 12:55 pm 

    Davy, you got any chickens following those cows? I hear they are good for breaking up and tilling the cow dung. Keeps the pasture cranking

  17. Michael on Mon, 29th Feb 2016 1:02 pm 

    “Western propaganda is so much better than non Western propaganda. Reading this piece I couldn’t but admire how well crafted it is. The Russians can’t lie like this, neither can the Asians or Africans. Western English language media are the best at lying, manipulating info, and distorting the truth, the rest don’t come even close.”

    That is because the English speaking western world LOVES to have their ears tickled by the smooth-tongued political machine…They certainly love to let someone else make the decisions, as long as they have a well thought-out speech to go along with it.
    Politicians have been lying to the public from the beginning and as long as one of them at least sounds like they have everything under control, the people are all too happy to let them stay in the position to keep feeding them BS.
    All we care about over here is Entertainment, Football, liberal rights, and freedom to be as dumb as we want to without having to think about all the logistics.

  18. rey on Mon, 29th Feb 2016 1:22 pm 

    The Russian trolls like to squeal but it doesn’t change the fact that Russia is screwed. :o)

  19. Wayne Mognet on Mon, 29th Feb 2016 1:30 pm 

    This nonsense would stop if the refineries in the USA could get crude oil from our country at a delivered price that was the same as or less than what they get from overseas. When they can buy from other countries and have it shipped to them at a cost that is less than what our great American Rail and Pipeline Companies will do it for, why would they purchase crude oil from American Oil Producers? The American Greed is our main problem!
    We need to stop the greed and Buy American will return and everything here will get better and the hell with OPEC.

  20. rey on Mon, 29th Feb 2016 2:04 pm 

    jaunP is a St. Petersburg Russian troll that can’t stand the truth about Russia’s main source of income (oil) so he pretends to understand the supply and value of oil now.
    Typical ignorant Russian troll. :o)

  21. ADA on Mon, 29th Feb 2016 2:16 pm 

    This article misses one thing, electric cars. Over the next 10 to 15 years as electric or battery powered cars take over the automotive market, the need for oil will decline and eventually the oil markets will collapse.

    Every major automotive manufacturer is either selling or has announced battery based models. Also most gasoline based cars are increasing their mpg rating. Oil is doomed within 20 years.

  22. Apneaman on Mon, 29th Feb 2016 2:24 pm 

    rey is a fudge packing poo miner who gargles monkey spunk for fresh breath.

  23. Apneaman on Mon, 29th Feb 2016 2:42 pm 

    For Some Producers, $10 Oil Is Already a Reality

    http://www.mysanantonio.com/business/fool/article/For-Some-Producers-10-Oil-Is-Already-a-Reality-6860753.php

  24. shortonoil on Mon, 29th Feb 2016 2:45 pm 

    “The Russian trolls like to squeal but it doesn’t change the fact that Russia is screwed. :o)”

    The TPTB has a vested interest in this one; they have sent their troll armies out. The gates of Mordor have been opened.

  25. Davy on Mon, 29th Feb 2016 2:47 pm 

    PM, you have been reading Joel Salatin. Chickens hanging out with my goats that are following my cows is the plan. It’s a process and I am 3/4 way there. No chickens yet.

  26. Apneaman on Mon, 29th Feb 2016 2:48 pm 

    marmi-noon noony-marm, here’s your boy Art with a podcast so you can learn yerself some oil FundamentalsNstuff.

    The Coming Bottom in Oil Prices Part I: Deep into Fundamentals with Art Berman

    Erik Townsend welcomes geologist and energy industry consultant Art Berman to MacroVoices. Erik and Art discuss:
    The crude oil backstory and the current oversupply
    The likelihood of a future production cut from OPEC
    Middle Eastern politics and how they will affect future oil prices
    EIA/IEA and other government agency statistics – Are they reliable?
    Oil storage considerations and the importance of Cushing, OK – How close are we to capacity?
    The Baker Hughes Rig Count – Does it matter?
    Iran and their ongoing production increases
    The US shale patch operators and their associated junk bonds – What is the chance of widespread default?
    Production decline rates for US shale producers
    Libya’s potential to affect this market – ISIS standing in the way?
    Identifying a bottom in the oil market and a whole lot more…

    http://www.artberman.com/the-coming-bottom-in-oil-prices-part-i-deep-into-fundamentals-with-art-berman/

  27. Practicalmaina on Mon, 29th Feb 2016 2:55 pm 

    6 Ruskys just died trying to rescue a stranded group of coal miners, fossil fuels, racking up casualties daily.

  28. shortonoil on Mon, 29th Feb 2016 2:56 pm 

    @Davy,
    When I was a boy my brother was allergic to cows milk. We had a small farm, and about 25 goats. Nice cold, pre-homogenized goats milk, and baked kid. You’ll be eating pretty well. The cheese is also delicious. easy to make, and keeps without refrigeration for months. It sounds like you have a plan, that’s more than can be said for most.

  29. Practicalmaina on Mon, 29th Feb 2016 3:00 pm 

    Davy nice. My cheap ass will be going the other way, chickens first. Maybe do chickens and rabbits in a hoop house to start, I think his books should be required reading in high schools.

  30. shortonoil on Mon, 29th Feb 2016 3:04 pm 

    “It’s a process and I am 3/4 way there. No chickens yet.”

    You have got to get those chickens going. Not only are the eggs important, and the meat, they’ll eat every damn bug within 5 miles. When the hydrocarbon based pesticide industry is gone, you are really going to need those chickens.

  31. Apneaman on Mon, 29th Feb 2016 4:38 pm 

    With Some Tar Sands Oil Selling at a Loss, Why Is Production Still Rising?

    “Energy-intensive tar sands production in Canada that requires steam to liquefy and extract the oil is expected to increase by 9 percent in 2016, according to the Canadian National Energy Board. Yet the oil currently sells for less than the cost of production when transportation costs are figured in, according to a detailed analysis by RBN Energy LLC, an industry consulting firm.

    “It’s not very pretty right now,” said Phil Flynn, senior energy analyst at the PRICE Futures Group, who was not part of the analysis. “Some of these companies are losing money on every barrel.”

    http://insideclimatenews.org/news/23022016/tar-sands-becoming-worthless-production-rises-even-prices-plummet

  32. Nony on Mon, 29th Feb 2016 4:38 pm 

    Ape:

    I like listening to Art. He is clear and interesting, even though I disagree with his conclusions. That podcast was a waste since the Townsend guy talked so much. There are many better youtubes of Art speeches out there on the net.

    Here is a good one, both Art and the “other side”:

    https://www.youtube.com/watch?v=ZKRyq5RubOY&feature=youtu.be

    There is also a good one with him and Scott Tinker a year later.

    Art actually seems to be (while still on the negative side) walking back from some of the total skepticism on shale. After all, gas prices have done better than he expected. Also, US LTO has dropped slower than he forecast. Although he has a bias, he is still amenable to data and to updating his views.

  33. opinionmaster on Mon, 29th Feb 2016 5:28 pm 

    As soon as the price of oil goes to 50 shale producers will be back in the game. When that happens you can expect the price of oil to decline back down again. If the world thinks they can price gouge the United States, I’ve got news for you, those days are over. Hybrid and Electric cars are very popular right now. Especially with much cooler looking car models to choose from. Good luck OPEC. You deserve what’s happening to you. All these decades burning the U.S. for your own greed. Shame on you!!

  34. Larry on Mon, 29th Feb 2016 6:01 pm 

    What do you mean by this comment:”There is unlikely to be any clear winner from ongoing low prices, which have been bobbing along close to 12-year lows). There is a clear winner–the american gasoline buying public. It’s also great for the economy.

  35. Apneaman on Mon, 29th Feb 2016 6:13 pm 

    opinionmasterbater, it’s happening to you ya fucking retard.

    “If the world thinks they can price gouge the United States,”

    Everyone in America could give the 3rd world blow jobs non stop for a hundred years and the debt for taking their resources would not be paid.

    Did I mention that you are a fucking retard?

  36. makati1 on Mon, 29th Feb 2016 6:31 pm 

    Larry, about like eating cake when there is nothing else to eat. It is delicious … while it lasts.

    As for “good for the economy”, then why is the Us still in a depressions after eight years of ‘recovery?

  37. makati1 on Mon, 29th Feb 2016 6:43 pm 

    Obviously the ‘electric car industry has a great propaganda department. So many fools actually believe they will be more than a toy for a few techies and dreamers.

    If you think they will replace even a noticeable percentage of the 1,000,000,000 plus cars on the road, you probably run after rainbows, expecting to find that pot of gold. Or you are in deep denial of reality. Or both.

    Do the math. The total world production of cars is about 60,000,000 annually. At that rate, it would take about 17 years to replace all of the oil burning cars on the road today. Of course, that does not count the electric cars junked because they are worn out or auto accidents where they are totaled, etc. Even doubling the output makes it at least a 10 year turnover.

    I don’t expect the oil industry to last 10 years, do you? And it would take a lot of oil to produce those billion plus new cars while also making the replacement parts for the other billion plus cars already in use. Plus the retooling of every car company and supplier to the new electric types. Plus… LMAO

  38. In the middle on Mon, 29th Feb 2016 11:36 pm 

    Mak. Of course it won’t happen overnight but it will happen. You make the best argument for it and don’t even realize it. You are funny.

  39. PoorPeter on Tue, 1st Mar 2016 8:52 am 

    You see as the prices drop U.S. producers are pumping more and more oil as efficiently as they can to keep up revenue. So, domestically we see oil production, which is different from natural gas or wet gas, going up instead of down. Now eventually oil production will decline because of no new wells being drilled but the decline rate for oil is less than that of natural gas. In fact there is a movement afoot and many companies are looking at drilling oil in shallow fields, cheap oil, using modern technology. I do not see oil prices changing for a very long time. The Saudi government will definitely be hurt by actions they themselves initiated. I have no compassion for them at all.

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