Oil prices will remain low after an OPEC decision on December 4 not to reduce production. Sure looks to me like OPEC is now essentially Saudi Arabia. What the Saudis decide is what OPEC will do. And what the Saudis have decided is to maintain production. Thus prices will continue at the current low level and the worldwide glut of oil will continue. In addition the OPEC producers will continue to burn up their foreign reserves.
12/4 – Wall Street Journal – OPEC Meeting Ends With No Production Cuts / Meeting marked by deep divisions; ‘shale is the new reality’ – Article points out a dramatic disagreement. Producers such as Iran and Venezuela want to maintain their production and have Saudi Arabia alone absorb enough of a production cut to balance the market.
The other side of the dispute is Saudi Arabia, who wants all OPEC members and even non-OPEC producers to share the production cut.
(I just realized that means Saudi Arabia wants American shale producers and Russia to join the OPEC cartel. I can’t image what odds you would have to give up for a Vegas bookie to take that as a bet.)
Article says the oversupply worldwide is sometimes up to 2M barrels a day.
Who is the swing producer?
In the past, Saudi Arabia was the swing producer. That means they would increase or reduce their production in order to maintain a rough balance between supply and demand and to nudge prices to the desired level.
The current situation has shown they have either lost or voluntarily surrendered (take your pick) their role as swing producer. That role now is filled by US shale.
Industry here will be able to rapidly ramp up production when prices rise. Remember there are well over 1000 wells completed in North Dakota. Those wells only need to be fracked before they start producing. I read a comment somewhere but did not keep the link that there are 2000 wells ready to be fracked in Texas.
That swing producer role will be filled imperfectly by US shale because the production doesn’t come off-line quickly. It will be able to ramp up but isn’t able to quickly cut back.
According to the WSJ article, one unnamed delegate reportedly from a Persian Gulf producer is quoted as saying:
“There is nothing at the moment that could be done from OPEC to correct the situation… Shale is the new reality.”
Cool. Very, very cool.
Article says Saudi Arabia’s monthly spending deficit is $10B. That means they’re burning through foreign reserves fast enough that it would be worth calculating a burn rate. No source cited or methodology provided for the spending rate. Hold that number for the next post.
OPEC as front for Saudi Arabia
12/1 – The Million Dollar Way – Memo to Jane Nielson – CNBC report reminds us that a year ago, the expectation was that increased Saudi production would cause waves of bankruptcies in the US shale oil market and cause production to collapse.
Not quite. Production in Bakken is down a bit but still strong. Spreadsheet I’ve been keeping shows production in September 2015 is down 5.3% from the high water mark in December 2014.
Drilling on a lot of wells is completed with the owners just waiting to frack the wells and start producing as soon as prices go up a bit. That’s lots of wells, as in 1,091 at the end of September.
Mr. Oksol’s perceptive observation is that OPEC is dead and irrelevant:
Just between you and me: I’m getting tired of all these “OPEC” stories. In fact, the events this past year in the oil sector prove beyond a shadow of a doubt OPEC is a sham. OPEC is Saudi Arabia. Saudi Arabia sets the course and everything else “OPEC” does is simply irrelevant. Ask Venezuela. OPEC is irrelevant; Saudi Arabia is not.
Makes sense to me.
Next post: more discussion on the ramifications.