Update on OPEC strategy
Fascinating to watch news in February about OPEC’s strategy. First, IEA sees a drop of US shale oil in 2016 and 2017 with strong growth in output over the following four years.
I have quite a backlog of lot of articles on energy to discuss. Will try to get caught up. Here goes…
Article at the end of January indicated OPEC is publicly claiming things are going swimmingly well. Then Saudi Arabia and Russia agreed to freeze their production at the January level, which is near record level of output for both countries. Then the end of February OPEC’s secretary-general acknowledged that the intentional goal was to wage a price war against US shale. Also acknowledged the price war hasn’t worked like they planned.
I don’t think that crippling the Russian, Saudi Arabian, and Venezuelan national budgets by dropping prices about 60% with no near-term expectation of recovery is quite what they had in mind.
2/22 – IEA sees oil market rebalancing in 2017; US production at record high by 2021 – The IEA forecasts that US production of light tight oil will fall 600k bopd in 2016 with another drop of 200k bopd next year. Forecast predicts an increase of 1.3M bopd over 2015 levels by 2021.
Total US production estimated at 14.1m bopd in 2021. Total OPEC production only forecast to increase 800K bopd by then.
1/27 –Wall Street Journal – Key OPEC Members Defend Oil Output Strategy – OPEC’s flood the market
…strategy is working as planned, and we believe it is so far working well.
That is a public comment from Kuwait’s acting oil minister. He publicly blew off requests by other OPEC members for an early emergency meeting. Saudi Arabia and its allies in the Gulf are standing firm while other countries such as Nigeria and Venezuela are calling for action to increase prices.
I wonder what the current budget forecast for Saudi Arabia and Kuwait looks like.
2/14 – Wall Street Journal – Saudi Arabia, Russia, Qatar, Venezuela Agree to Freeze Oil Output at January’s Levels – Not quite a complete blink. More like blinking while pretending to brush something out of your eyes.
Saudi Arabia and Russia agreed to limit production to full-steam-ahead-levels if other producers, specifically Iran and Iraq agree. That is reportedly a compromise between those (like Venezuela) who want a production cut and others (Saudi Arabia) who want to keep going full steam.
I would guess the odds of Iran buying in are somewhere in the range of zero.
2/22 – Blomberg business – OPEC Not Sure How It Can “Live Together” With Shale Oil – Not that anyone needed the extra confirmation, but article provides a variety of comments from the secretary-general of OPEC verifying OPEC strategy of the last year and a half has been to take out the US shale industry.
Mr. El-Badri said:
Shale oil in the United States, I don’t know how we are going to live together.
He acknowledged that any increase in price will result in a relatively quick increase in shale production. The dynamic here is that shale oil can be brought online far faster than conventional wells. Keep in mind there are close to 1,000 wells in North Dakota that can start producing with a frack job and installing the top-side equipment.
Article explains OPEC intentionally launched a price war against US shale, Canadian oil sands, and Brazilian offshore oilfields. The starting point was November 2014. Again, not that many people need the confirmation, but those comments show the intentional goal all along was to take out US companies.
To confirm what I’ve been thinking for a long time, specifically that this hasn’t worked like OPEC planned, article says Mr. El-Badri acknowledged oil prices have dropped farther than OPEC had expected.
He indicated OPEC will revisit their so-called production freeze in three or four months. I say so-called because the freeze is at record levels of output for Saudi Arabia and Russia.
He also gave a caution that the extremely low prices have resulted in oil companies not investing any money in new production, which means prices could shoot very high when demand increases.