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OPEC may condemn the world to an oil glut for years

OPEC may condemn the world to an oil glut for years thumbnail

The Organization of the Petroleum Exporting Countries could flood the market with oil for years if it opts to do nothing to alter its output ceiling at a highly-anticipated meeting in June.

“If they don’t do something and find a way to get on the same page, we will all be floating on a glut of oil for a very long time,” warned Kevin Kerr, president of Kerr Trading International.

Questions about OPEC’s oil production are being raised as the oil cartel is set to call its first meeting since November 2014. Back then, OPEC’s vow not to cut output sent crude-oil prices plunging. Although prices have recovered somewhat in recent weeks, they are still sharply off their 2014 peak levels.

OPEC has maintained a collective production ceiling of 30 million barrels a day since it did away with individual country quotas about three years ago, and analysts expect the oil cartel to stand pat on that target when members meet on June 5 in Vienna.

But if OPEC decides not to change its target, it’ll be a “big signal that it is determined to continue with its policy to not give away market share,” even if prices fall as a result, Bhushan Bahree, senior director of OPEC and Middle East research at IHS told MarketWatch.

OPEC oil production estimates

OPEC has already been pumping more than it said it would. The group produced 30.93 million barrels a day in April — the highest monthly total since November 2012, according to a Platts survey of OPEC and oil-industry officials and analysts released May 8. Output in Saudi Arabia, OPEC’s biggest producer and the country with the most spare output capacity, is on the rise, topping 10 million barrels a day in April.

The Saudis have “effectively said, by doing what it’s doing” and not cutting output despite the drop in prices, that it would “rather maintain its share of the [oil] market and that other high-cost producers should cut,” said Bahree, who was at the November OPEC summit and plans to attend next month’s meeting.

Production has climbed even though prices for West Texas Intermediate CLN5, -1.56%  and Brent LCON5, -1.67%  crude still trade more than 40% below their peak prices from last summer.

‘The real ongoing question here is the future of OPEC vs. non-OPEC supply and production.’

Kevin Kerr, Kerr Trading International

Oil producers ‘must come to some agreement on [output] curbs, or it’s like a game of musical chairs without any chairs,” said Kerr. “Everyone loses.”

The “real ongoing question here is the future of OPEC vs. non-OPEC supply and production,” he said.

Saudi Arabia has made it clear that it doesn’t want to lose market share to non-OPEC producers.

The “battle” for market share has just begun, the International Energy Agency said in its latest monthly oil report. At the meeting in November, OPEC decided not to cut production and that was “only the first step in a plan that includes actually ramping up output and aggressively investing in future production capacity,” IEA said.

But it’s “not just a question of non-OPEC supply when it comes to sharing out the oil-market pie,” Kerr said.

There also will be the recovery of Iran’s oil output to contend with, assuming sanctions on the country are lifted if it strikes a definitive deal with Western powers over its nuclear program.

“They better take Iran’s output recovery seriously because Iran is determined to pump as much as possible,” said Kerr.

The OPEC meeting takes place just weeks ahead of the June 30 deadline for a final nuclear agreement between Iran and six world powers. The pact is expected to lead to sanctions on Tehran being lifted, as well as the eventual return of more than one million barrels a day of Iranian crude to global markets, said Kerr.

In a matter of months, Iran could lift output by around half a million barrels a day or maybe more, said Bahree. “Beyond that, it’ll take time” to get the financing and find the expertise it needs to further raise output.

As for the OPEC meeting, “there’s no sign that anything is imminent in terms of a “combined wider agreement beyond OPEC to reduce production,” Bahree said.

But OPEC didn’t do anything at its last meeting in November and “that was a decision that shaped everything,” he said. Brent prices have dropped 12% since then.

market watch

11 Comments on "OPEC may condemn the world to an oil glut for years"

  1. penury on Fri, 22nd May 2015 3:06 pm 

    Assuming that an infinite amount of oil is available to produce and that there is an infinite capacity for the people to afford this oil, I heartily applaud the decision to produce at a maximum level. After all we deserve all the energy that we can produce, these gadgets don’t run on air.

  2. dubya on Fri, 22nd May 2015 3:24 pm 

    So the rag-heads are getting two or three times as much for their oil as they did for the past 70 years; probably a little more than the rate of inflation. I’m not sure why that’s a problem.

    The Brits are buying back their oil for a few times what they sold it, so that’s all good.

    The American’s are energy independent now so they don’t care about the price of oil.

    BC has a dozen NG pipelines planned to half a dozen LNG export terminals so that’s solved all our problems.

    So life is good. Go out and play.

  3. dubya on Fri, 22nd May 2015 3:38 pm 

    Oh, sorry, I forgot to mention that the oil sands have a glut of oil, Opec has a glut of oil, the frackers have a glut of oil and the shippers have a glut of oil.

    Here a glut,
    there a glut,
    everywhere a glut glut.

  4. rockman on Fri, 22nd May 2015 4:28 pm 

    “Saudi Arabia has made it clear that it doesn’t want to lose market share to non-OPEC producers.” And I’ll ask the same question I’ve asked elsewhere: OK…the KSA has snatched someone’s oil market away from them. So exactly who isn’t selling their oil today? That is what a “market share”, isn’t it: someone was selling their oil but now, thanks to the high KSA production level and lower prices someone has to lose their former buyers…right? Otherwise if someone hasn’t stopped producing their oil then they are still supplying their share of the market.

    Maybe Iran will get to sell all the capacity into the marker place. But they aren’t doing so today so they’ve taken no one’s customers away. And what if they do start selling their max oil: two dynamics have to kick in for them to take market share from the KSA or anyone else. First, there can’t be an increase in oil purchasers. Thus someone would lose those buyers to Iranian oil. Second, if there isn’t an increase in buyers Iran will have to sell cheaper than the KSA or anyone else for market share to be lost. So that’s the world these folks envision: the Iranians will lower oil prices in order to undercut the KSA et al. And with a price war underway there won’t be new buyers coming into the market place???

    But isn’t that the exact situation they describe that we have today: new buyers coming into the marker because the KSA (and all other oil producers for that matter) have increased production and thus causing lower oil prices.

    There seems to be a misstep in their logic.

  5. Plantagenet on Fri, 22nd May 2015 4:55 pm 

    It seems unlikely to me that OPEC can flood the market with oil for years go come. Most OPEC nations have already peaked and KSA is very close to peaking.

    Yes we are in an oil glut now, but I doubt it will continue for years into the future.

  6. Nony on Sat, 23rd May 2015 2:42 am 

    Rock, the marginal producers. Duh.

  7. Chris Hill on Sat, 23rd May 2015 7:01 am 

    I’ve read a lot from some big players that the glut will continue. The trouble is, whenever I see that sort of thing in mainstream media, I can’t help but want to bet against it. I just got a propane contract for $1.499 from my provider. I can either take it as is, pay $.10 a gallon more to get the cheaper price if it drops or pay as I go. I took the contract as is. I really doubt propane will be $.10 cheaper later this year. If I could get such a contract for gas or diesel without having to store it, I’d be all over it.

  8. shortonoil on Sat, 23rd May 2015 7:31 am 

    According to the EIA, between 1960 and 2009 world petroleum production increased from 20.99 mb/d to 72.26 mb/d. That is a 50 year average annual increase of 2.51% per year. Between 2012 and 2013 world production increased by 0.23% per year.

    Between 2012 and 2013 production was increasing at about 1/10 the rate it has been increasing for the last half century. Apparently, according to the “oil glut” theory of recent over production the world has been in a glut for the last half century!!!!!

    Now that the MSM has gone from very stupid, to moronically stupid we would like to propose another theory that does not require one to become completely, totally brain dead to accept. Of course, if one finds it comforting to accept the nonsense extruded by the talking heads of CNN, be our guest. Otherwise, stop in to see us.

  9. GregT on Sat, 23rd May 2015 10:50 am 

    The oil age will end in a glut of oil that the world’s economies can no longer afford. It is not the amount of oil that matters, but rather how much it costs to produce.

  10. Read on Thu, 28th May 2015 3:32 pm 

    To Dubya.

    As I get older, I appreciate the value of simple kindness.

    Your generalization of the Arab world and OPEC members as “ragheads” isn’t very helpful and diminishes you.

    Once we start demonizing races it’s a short hop to the train ending at the genocide terminus.

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