STOP BLAMING OPEC FOR LOW PRICES
By Nick Cunningham oilprice.com Posted on Sun, 25 October 2015
We are a little more than a month away from OPEC’s next meeting, which will be held in Vienna on December 4, 2015.
OPEC altered the course of the oil markets last year when it decided to cast aside its traditional role of maintaining balance through production cuts. Instead it pursued a strategy of fighting for market share, contributing to an immediate rout in oil prices. WTI and Brent then went on to dive below $50 in the weeks following OPEC’s decision.
OPEC is widely expected to continue its current strategy at its next meeting, and as such, no rebound in oil prices is expected, at least not because of the results of the group’s meeting in Vienna.
But that raises a question about what the world of oil expects from OPEC: Why is it that the responsibility for balancing the market falls on OPEC? Why should OPEC be the one to fix the imbalances in the global crude oil trade?
On the one hand, it makes a certain degree of sense that market watchers anticipated adjustment from OPEC. After all, the group has historically coordinated its production levels in an effort to control prices, or at least influence them. They could cut their collective production target to boost prices, and vice versa.
However, there is an element of imperialism and superiority in the expectation that the burden should fall on OPEC, which is largely made up of producers from the Middle East. It is a bizarre mentality to think that private companies deserve to seize as much market share as they can manage, after which OPEC producers can take what is left. Steven Kopits, President of Princeton Energy Advisors, laid out the concept very nicely in a Platts article earlier this year, in which he says the expression “call on OPEC” should be scrapped.
Kopits offers an interesting thought experiment. If the industry in question were, say, automobiles rather than oil, there is no question that such an arrangement would not be framed in the same manner. Imagine that the world thought it reasonable that GM or Ford could take as much market share as possible, and Toyota was expected to slash production if there weren’t enough customers left over. It is an absurd scenario, but not so different from the world of oil.
Why is it that we expect OPEC (and since Saudi Arabia is the only producer with the substantial ability to ratchet up and down production, we really are talking about Saudi Arabia) to cut output in order to help out American oil producers? Saudi Arabia and its fellow OPEC producers have their own interests, and if they believe producing at a certain level is prudent, it is a bit curious to argue that they are “declaring war on U.S. shale.” But that is exactly what happened last year when they decided to leave their production levels unchanged.
Moreover, while cutting production would help to increase prices, OPEC would lose out from selling less oil. It is not clear why OPEC should, in effect, subsidize higher cost production from around the world. Saudi Arabia tried to cut production in the 1980s to rescue prices from rock bottom levels, but it only led to the loss of market share. It is no wonder that the oil kingdom is not keen to go that route again.
Even leaving all of this aside, it is hard to even discern that such a “war” is actually taking place. After all, OPEC has only slightly increased output from 2014, and much of it came from Iraq, which has been trying to increase production at all costs, regardless of OPEC decisions. Iraq is not subject to the quota restrictions, and so it is pulling out all the stops to increase output.
The U.S. on the other hand, has aggressively increased output. It is easy to see that much of the responsibility for the crash in oil prices stems from a massive spending spree in the U.S. shale patch, which increased output by around 4 million barrels per day between 2011 and the peak in 2015, nearly doubling production from 5.6 million barrels per day (mb/d) to 9.6 mb/d. OPEC’s production, meanwhile, hasn’t changed dramatically over the same time period.
In this light, why is it that OPEC’s decision to leave its quota unchanged in November 2014 elicited calls that the cartel was waging war? Why is the world not calling on U.S. shale producers – which have a much higher breakeven price – to get out of the business so that other oil producers around the world can survive? In any other sector, high-cost producers are forced out of the market. Nobody expects the stronger producers to cede ground to weaker ones.
U.S. production is now down by about 500,000 barrels per day since April. Oil prices will rise over the next year or so as U.S. shale is forced to cut back. That adjustment – high-cost suppliers forced out – is how markets are supposed to work.
Nevertheless, as OPEC heads to Vienna in six weeks’ time, there will undoubtedly be more headlines about OPEC continuing its war on shale.
Article Source: http://oilprice.com/Energy/Oil-Prices/Stop-Blaming-OPEC-For-Low-Pri...
By Nick Cunningham of Oilprice.com
Views: 1267
Replies to This Discussion
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Permalink Reply by Clyde T. Williams on
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It ain't the US that KSA was upset with....try the 10MMbbl/day of the Russians who are trying to supply and sell to the Chinese an even the Chinese who are trying to pump as much as they can....both are not members of OPEC...then the OPEC-Nigerians and Venezuelans who were undercutting their fellow OPEC members....OPEC-Iraq/ISIS....and upcoming Iran...all of this weighed on the Saudis, Emiratis, and Kuwaitis...so as usual Saudis said that is enough being nice has not worked....and dropped their announcement while everyone was setting up their 2015 drilling/transport/production/processing plans....
Good show for my friends in Yanbu/Jubail, AbuDhabi...ten years ago it cost $16-18/bbl loaded and everyone was stockpiling the $$$$$ they learned a long time ago to be conservative in expenditures...unlike Russia, Nigeria, and Venezuela....By NOT DOING ANYTHING they did so much to their unruly competitors both in and out of OPEC and the timing was so good....
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Permalink Reply by Michael P. Meador on -
I actually do not blame opec for this. I do blame Saudi Arabia and continued broken agreements. In most cases these agreements were failures by our own government in partner with SA dating back to WWI. I will fast forward to WWII when the agreement was made that the US would protect the region for oil. With the discovery of several oil fields in that region SOCAL took on partners, Texaco and later smaller share holders, Exxon and Mobile. In 1950 the king threatens to nationalize it oil holding as had Venezuela before them. The US folded and allowing King Abdulaziz his demand of a 50/50 split + a no tax agreement. (Battle number 1) By 1974 the government of SA increased its shareholdings to 60% and took the management and operations of the oil fields. The managing company was Aramco. Shortly there after the Aramco oil company created an embargo against USA for our standing with Israel in the Yom Kipper war. I remember the inflation and 22% interest rates and the long gas line and buying gas on even and odd days. (Battle number 2) Make no doubt about it was a battle for every American and an attempt to take us down. Price gouging can be managed and overcome and the US did. The problem is that so few remember or care enough to review history. (Battle number 3) Came when they told us we could have all the oil we needed but at triple the price and oh yes it is still our duty to protect them so our/their oil supply is protected. Fast forward to $117.00 oil and American shale operators understanding the George Mitchell gift of hydraulic fracing. This allowed shale operator and landowners the opportunity of profit for the first time in shale formations. It allowed our country the opportunity to obtain energy independence. The battle #4 occurred in December 2014 when dumping began. It does not matter to me if someone write a paper in NY explaining this is not a war. I understand history. I see it first hand. I see families losing jobs, and income. I see communities with prior hope now in disrepair. We are individuals that are being attacked by a country (SA) while our own country does nothing except write articles why this not a war. Please take a look at those that have lost their jobs or gone bankrupt because of this and you will recognize that it no different than being a causality in battle. They are walking around but have lost all except breath. Remember I stated price gouging can be managed but price dumping cannot be considered anything but a blatant attempt of ruination of the American economy. Market share seems simple enough but when we give it freely and attempt to make it seem normal I must disagree. I do appreciate the opportunity to share my thought on this subject.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Michael, excepting the version of history you espouse every petroleum exporting country could claim Saudi Arabia is maintaining production volume to hurt them. They can all claim to be "the target". Russia would likely be first on that list and could add that SA is doing this in partnership with the U.S. to punish them. Next, the Iranians, long the sworn enemy of SA and a damaged economy that desperately needs oil above $100. Then any number of exporting countries that have built their society on subsidies paid for by crude export. Venezuela would be a prime example.
You may choose to view the SA policy of defending price as an attack on U.S. interests if you choose however I think you will have to get in line. I also think the Saudis are much smarter than many give them credit. They know that they can not ruin the American economy and that any companies that go bankrupt will have their reserves acquired by another energy company. And that unconventional reserves will be produced regardless of what they do based on F&D and lifting costs. In other words, a number of unconventional basins remain profitable at $40 oil and some companies have claimed the ability to continue drilling their core rock at $30. Yes, the pace of drilling will vary but U.S. unconventional production isn't going away. It will remain a major force on global price. U.S. energy companies will be the new "swing producer".
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Permalink Reply by Michael P. Meador on
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You forget that the SA reserves is around seven trillion dollars. Those are mostly our dollars that we started paying them in the 1930's. Most of the other countries you mentioned are late bloomers compared to SA. Additionally in other countries the oil industry is run by the country thus protected by the same country. In America it is private enterprise. This means the further down they drive the economy here or somewhere else they can be the ones buying out the independents and quite possibly your neighbours. Don't forget that Aramco has offices in the US. Their effort was an independent effort and has left even members of OPEC with large deficits. In fact yesterday the prince of Saudi Arabia was talking about even their deficit caused by this low oil price over market share. His statement was that with the large 7 trillion in holdings that they would work out of it but that does not include the countries that you named off. I actually am not worried about them but I am worried about the people here in America. I think you need not look any further than your own area and can see the downturn. Do you actually think what was done is healthy? I have followed you in the past and normally agreed with most of your opinions and continue to follow you but in this case I must just state we are in disagreement of what is actually going here at home. The term swing producer bothers me. The laws must change unless you mean to be swing produces only for ourselves here in the US. We must be able to export. Even then we need to have energy independence because you nor anyone else can guarantee what will happen in the Mid-east oil fields. I see this as a Security issue and hope that others can understand how critical production is for our own country. It is not even about the price of oil but it is about recognition of possible problems. It is about being prepared. Your outline only makes me worry more, not for my sake but for those who will follow and make the statement :They knew there was a problem, so why didn't they do something? The answer will be they believed they were in good hands and the policy of buying oil was the best plan. The next statement will be-But now they are selling our oil resources because we believed and nothing was done to protect it. Why? Once again thanks for the opportunity to express my view. I agree with most of your statement but I do not give anyone a pass with our freedom or national resources without opening additional thought as to why we are in disagreement on certain parts of the conversation.
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Permalink Reply by Skip Peel - Mineral Consultant on
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IMO the law of supply and demand and the nature of unconventional reservoirs will make the U.S. the global swing producer, not laws. Whether U.S. producers export or not will make no difference. I'm not worrying about energy security as current reserve calculations provide long term stability for domestic production. Yes, there is a downturn in my region but it is modest. There are 31 rigs currently running in 7 N LA parishes and 13 in Lincoln Parish alone. There is more to the level of development activity than the price of oil and natural gas. Much of the problem is constrained capital budgets which leave little for operations owing to tremendous debt loads that eat up cash on hand and cash flow. Far too many companies are over leveraged leaving them with few options. The Haynesville Shale, my backyard, is a cautionary tale of taking big risks and incurring big losses by the early movers. Some in the industry heeded the lessons and some did not.
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Permalink Reply by Michael P. Meador on
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I appreciate your putting up with me and my thought processes. You sir are and have been more than kind..
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Permalink Reply by Skip Peel - Mineral Consultant on
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You're welcome, Michael. Those of us here in the Haynesville Shale had a front row seat for the insanity that developed out of the land rush. Crazy lease bonuses, incredibly poor due diligence on title work and way more rock leased than could be drilled under 3 year primary lease terms resulting in some less than optimal well designs. A primer on how not to lease and HBP an unconventional play. Aubrey and Floyd were most to blame but the insanity infected even the likes of Shell, Encana and XTO. I hate to see the industry go through this downturn but it's just part of the boom and bust cycle of the game in its latest incarnation. There is plenty of blame to go around.
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