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OPEC Looks Totally Bewildered by the Oil Market

OPEC Looks Totally Bewildered by the Oil Market thumbnail

It may be too soon to write OPEC’s obituary, but the oil producer club appears in urgent need of late-life care. It shows little understanding of where it is, how it got there or where it’s going. While it still manages to collect new members here and there, its core group looks more fragile than at any point in nearly 30 years.

The historic output agreements, put together so painstakingly last year, are failing. Nearly 12 months of shuttle diplomacy culminated in two deals that would see 22 countries cut production by nearly 1.8 million barrels a day. Implementation has been better than for any previous output cut, with compliance put at 106 percent in May. A resounding success? Hardly.

We’re now in the final month of those deals and oil prices are lower than when they were agreed. Not only have producers sacrificed volume, but they earn less for each barrel they do produce.

Nothing Gained
Crude has fallen back below levels last seen before OPEC’s November output deal
Source: Bloomberg
Note: Brent crude

The recent extension of the deals just leaves output restraint in place for another nine months, the best response OPEC could muster. Deeper cuts were barely mentioned. Assertions to do “whatever it takes” ring hollow.

Indeed, there’s no appetite for the big cuts that would demand real sacrifices in countries such as Russia, where normal seasonal factors helped it lower production in the first half of the year. Just sticking to current output levels could be difficult for the rest of 2017: early maintenance work has helped several OPEC members meet their targets but that can’t continue. Then there’s the problem of recovering output from Libya and Nigeria, both exempt from the cuts.

The malaise runs much deeper, though. Beneath a veneer of unity, rifts are developing among core Middle East members. The Saudi-led confrontation with Qatar could create the most serious split since Iraq invaded Kuwait in 1990. As I wrote last week, Iraq might be in Mohammed bin Salman’s sights next,¬†as Iran’s influence there grows and Baghdad lags the rest in implementing output cuts.

Iraq’s Over-production

As if the internal failings weren’t enough, OPEC seems to have lost touch with reality. Ministers say higher prices are needed to pay for¬†investment in future production capacity, issuing dire warnings of a future supply crunch. They said the same thing to justify prices soaring above $100 a barrel in 2008. It wasn’t true then, and it may not be true now.

The oil industry has responded to the price slump by slashing costs. Projects that needed $100 crude to break even have magically been redesigned to be profitable at half that level.

OPEC has completely misjudged the North American shale industry and seems not to understand how it is still evolving rapidly. It’s a little like trying to explain the internet to my 85-year-old mother, or my 12-year-old daughter trying to explain social media to me. As consultant Morten Frisch tells me, drilling horizontal sidetracks from abandoned wells in the Permian Basin is yielding a 91 percent internal rate of return on a $7 million investment and delivering 1,500 barrels a day of crude. He predicts large production increases from vertical wells in previously produced areas in the Permian.

Having failed to use the good times to invest for a future of low oil prices, OPEC is facing a crisis of old age. It is falling apart internally, confounded by the world and increasingly irrelevant.


9 Comments on "OPEC Looks Totally Bewildered by the Oil Market"

  1. cam on Sun, 25th Jun 2017 11:22 am 

    Nothing but good news for oil consumers? Well, in the short term at any rate!

  2. bobinget on Sun, 25th Jun 2017 11:56 am 

    Do we really need to explain rapid shale depletion?
    The other day I called shale nothing short of Ponzi.

    Ponzi depends on a constant stream of ‘new’ investors. A New Shale Well need be drilled long before recently drilled wells quickly falter. Early ‘investors’ stand to make enormous profits while late buyers get killed.

    If Saudi Arabia’s intention was to bankrupt shale by flooding world markets, they misjudged our
    engineering, marketing and investors.

    There’s a dozen reasons most new tech comes out of the US. On the ground oil people in America are as brilliant as marketing men and energy investor class are like our current con man president, dumb crooked.

    “Keep doing the same task over and over the same exact way, expecting different results”

  3. rockman on Sun, 25th Jun 2017 12:27 pm 

    “Projects that needed $100 crude to break even have magically been redesigned to be profitable at half that level.” Made up numbers with zero supporting DOCUMENTATION that too many civilians blindly accept.

    Not sure how OPEC can be “totally bewildered by the oil market”. It is preforming exactly as it always has: the refineries set the price of oil they are willing to pay based upon their projection of what consumers will be willing to pay for refinery products. Cutting production won’t automatically increase the price of oil if the consumers decrease what they are willing to pay.

    The oil market is behaving exactly as it has always behaved. Consumer demand, at a certain price level, determines what the refineries will pay for oil. That’s been the dynamic since Col. Drake drilled the first well. Baseless thinking by ignorant writers is not going to change it.

  4. shortonoil on Sun, 25th Jun 2017 3:01 pm 

    A barrel of oil is losing $14.99 of value to the economy each year. That will continue and the Saudis will remained confused.

  5. Anonymous on Sun, 25th Jun 2017 3:59 pm 

    Projects have not gone from 100 to 50. They’ve gone from 60 to 50. And they really were at 60 when production was exploding. All you have to do is look at how the rig count responds to price to see that.

    And FWIW, shale has totally confounded and stomped on the peak oilers. Where is Ace? Where is Staniford? Where is The Oil Drum?

  6. Thomas on Sun, 25th Jun 2017 8:28 pm 

    OPEC is the only cartel that is allowed in the capitalist system to fix price but they seem dumb at using their opportunity, and instead allow the greedy Wall street or London (mercantile exchange) investors that have nothing to do with the physical oil to dictate oil price at which the people who actually sell or buy the physical commodity have abide to. OPEC, if Smart, have two options:

    Option #1: They can decide a price and have all OPEC members sell their oil at the price they all agree to (say $60). They can do this and take away the control from greedy investors who drive price up or down for their own gain. OPEC controls about 40% of global supply, if they fix their price, buyers would be forced to buy because they have no choice. Consuming countries cannot wait to get supplies from limited non-OPEC countries (who are all already pumping their maximum possible) and have their energy and transportation grind to a halt, waiting for their turn to receive oil supply at the lower price determined by wall street. I bet that Russia will join to sell at same price fixed by OPEC members (or very close to it)and the rest of the poor producing countries would join in to sell at same price also and that will eventually result to the death of price determination/manipulation by wall street.

    Option #2: OPEC can decide to cut production by say a huge amount, say 8M bbl/day, a gap which will be impossible for US shale producers to fill in many years. By doing this, they will drive oil price above $100 (and rising) immediately. They will make more than double or triple their current revenue while lowering the depletion of their oil reserves – which will be a win-win for all OPEC members (much higher revenue with lower reserve depletion). By cutting so deep, it will take US shale producers many years to replenish 8M bbl/day and before they can get to the point of replenishing it, shale reserves would have dwindled so much if not totally exhausted and OPEC will have full control of oil price like never before.

  7. makati1 on Sun, 25th Jun 2017 8:57 pm 

    1. They cannot set a price and forget it. None of the OPEC nations have ever set a price and kept it for more than a few days. The needy will always cheat.
    2. $100 oil would destroy the world economy in a month and end the need for oil.

    They are playing a losing game and it is going to end in a ME war, I think.

  8. Anonymouse on Mon, 26th Jun 2017 2:30 am 

    Hey narractiveman, I know on your planet, refineries set their prices based on what ‘consumers’ are ‘willing’ to pay, ROFL. You never lose an opportunity to spread that fertilizer around. Its almost as bad as your Obama-personally-oversaw-all-US oil-production trope you peddled for what?, eight years running I imagine.

    But on this planet, consumers dont have squat to say about what the uS oil cartels actions will be. In the future, I suggest prefacing your homey consumer sovereignty myth comments by reminding everyone that those conditions only apply to the alternate earth rockerman lives on, and not the Earth the rest of us happen to inhabit.

  9. Davy on Mon, 26th Jun 2017 5:53 am 

    mouse, I am surprised you are not trying to peddle Canadian oil sands are American anymore. I shoved that up your ass good. LOL.

    Rockman is an adult and he has been in the business for decades. You are just a 5th generation stupid Canadian anti-American millennial. Go back down in mom’s basement and play with your Xbox because that is all you are good at.

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