One commodity analyst got it right: the OPEC cuts would not work. After November last year when the oil cartel announced its agreement with Russia and 11 other producers to curb production in a bid to prop up prices, the overwhelming mood was optimistic. The main worries were that some members would cheat and that U.S. shale may prove to be more resilient than previously believed.
That’s exactly what happened. U.S. shale did prove more resilient, although it has its own cloud hanging over it: debt levels. OPEC members did not exactly cheat, but some of them were slow to reduce their output as agreed. And, of course, Russia got the better end of the bargain, agreeing to a puny 300,000 bpd reduction—and a gradual one at that—from its record-high October daily production rates, while Saudi Arabia had to shoulder a burden of about half a million bpd.
Prices went up to about US$50 a barrel in the month immediately following the agreement, and stayed above US$50 over January. Then the oil price slide began—hesitant at first, and then steadier as the months went by.
Today, oil is back to pre-agreement levels, and optimism has largely given way to pessimism. Eugen Weinberg has been saying this for a while, but he has been a lonely voice among bankers who rushed to revise their oil price forecasts upwards before the ink on the OPEC agreement was dry. Related: Shell Nigeria Declares Force Majeure On Nigerian Light Oil Exports
Commerzbank’s head of commodity analysis wrote in early December that the OPEC production cut would only serve to strengthen the rise in U.S. production, and he kept his outlook on oil prices unchanged: Weinberg forecast that crude would slide below US$50 this year, which is exactly what is happening right now. Meanwhile, these same banks that were quick to revise their price outlook upwards are now just as quick to downgrade their earlier outlooks as the bleak reality firmly settles in.
Weinberg advised OPEC to change tack and go back to what it set out to do initially: stifle U.S. shale by pumping at maximum. “They should let prices crash to kill shale and then aim for steady price increases in the long term,” Weinstein told Bloomberg. The question remains, however, whether OPEC, with oil-reliant budgets already strained, could afford this tactic reversal now that they’ve suffered price lows for an extended period of time. Related: Is Wall Street Funding A Shale Failure?
And while it would hurt to do just that, OPEC may not have too much of a choice. The options right now are 1) to keep going with the cuts as-is, 2) to deepen the cuts, and 3) to give up the cuts and follow Weinberg’s advice. The first option would result in no great change in prices, most likely, and it might add fuel to diversification efforts. These efforts, however, require a lot of investment, which would be hard to come by if OPEC chooses option three.
Option two is perhaps even worse than the others: an OPEC insider, Qatar’s ex-Oil Minister Abdullah al-Attiyah, told Bloomberg that deeper cuts will only benefit U.S. shale boomers, and would not benefit OPEC. “The problem is that there is someone waiting in the dark corner for OPEC -- it’s shale oil producers and whenever prices rise, they raise production,” he said.
In the price context, Weinberg’s suggestion to return to maximum production may at some point make the most sense. Prices may indeed take a nosedive if OPEC turns the taps on full max. Yet, the decline may not be as severe as OPEC fears—a possibility that would further poke gaping holes into precarious oil-dependent budgets.
And given the political diversity of OPEC, would the group realistically be able to rally its troops behind such a painful move, even if it wanted to?
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By Irina Slav for Oilprice.com
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The fears of lack of investment causing a price spike are real, and it's a worse case scenario for all producers. Sure, you would get 6-12 months of high prices, but it would be followed by years of pain.
But they didn't commit, and made it worse with the cuts. The drill rigs came flying out of the woodwork and the US is expected to set an all-time production record next year. To flood now starts the waiting period all over again, from a much higher production level. It might work, but they've wasted time, bled more cash and now might not be able to stand the pain needed.
It's a lousy situation, probably the best they can do is hold where they're at, keep prices in a $40-55 range, hoping that demand increases can absorb shale and other production for the next few years. There's no short term solution, they can only think in terms of 2020 and beyond. Maybe the lack of investment will eventually lead to a tighter market. Maybe.
Mission accomplished, $45 - 55 the new norm.
Had they maintained production levels to early 2013, the shale patch would not had the pressure to innovate and prices would have come down slower and production levels for US Shale would have stayed muted.
Prices would not have crashed to the 30's - probably low 50's and OPEC budgets would not have been crushed.
If they return to flooding the market they will be bring social unrest to their countries while only knocking out a few shale companies (most are in much better shape than 2014)
Best option for OPEC - realize shale is here to stay and that production cannot go much above 10M barrels for shale over the medium run, cut production a little more back to early 2014 levels (yes, lose some marketshare but $60 oil much better at lower production that all out at $30 barrel), cap Libya and Nigeria. And most importantly, help the world economy flourish by keeping prices moderately low so demand grows. Without major projects and discoveries happening the last 3 years...this low investment will lead to supply needs as demand increases.
In other words, be patient and let demand drive the equation.
This talk about OPEC losing control of the markets is ridiculous.
This seems to be a mental issue with certain leaders, who came out of some learning from someone somewhere. They are matrix thinkers, not P&L thinkers. Many matrix thinkers fall behind the growth curve, thinking survival long term. Sad... you can do both and thrive.
Thus why Dems will continue to fail and the Trumps dog them at the polls.
If you snooze, you lose. Ask your body when your +55 yrs of age.
It's a natural law in the universe. If you snooze, your opponent will gain advantage...when you refuse to change.
Say they all go to max-production, and the price of oil drops to something ridiculous, like $20, OPEC countries will starve while most shale producers are hedged.
OPEC wanting to destroy shale is like Luxembourg announcing they intend to conquer the world.
Hey remember kerosene ? Same thing here, something better comes along and replaces it. Its pretty easy to see where we are heading. We have near worldwide market manipulation just to keep oil in the mid $40 range. You think they will cutback forever. Sure......get in line for some ocean property in North Dakota.
Lucky for us, they will never agree to such massive production cuts.
Note to all Socialist/Fascist/Communist/Progressives: The market always wins!
Open up the taps first and flood the market with as much oil and gas as can be immediately produced.
Wait 3 months, then turn of the taps completely (or say you will) and drive the price up to crazy levels.
Wait three months, and turn on a flood of product.
Turn the market into chaos, remove any price or supply certainty, and no one will risk investing in new exploration and development.
Wait for natural demand growth to mop up excess supply.