PETROANALYSIS || ARTICLE

OPEC, Russia and shale are in the same boat

Article by

Mazhar Al-Shereidah

Some are announcing OPEC’s approaching death, but where does the truth lie?

It would be useful for those who celebrate the US number one position as an oil producer to compare the number of their producing wells with those in Saudi Arabia. This short exercise shows that the reality is that the very poor productivity in the US reflects a structural weakness that can only be overcome through political maneuvers. This is why OPEC is so vital to the very survival of US domestic oil industry.

In fact, all excess oil supply in the market is a post-1974 phenomenon due to Kissinger’s strategy to hike oil prices, recycle the petrodollars and salvage the embattled US dollar. Now, low-production-cost crude faces the “end of the stone age” spectrum.

Once again, OPEC is at the crossroads of market share or price defense. But additionally, President Trump is not giving diplomacy – which is by definition subtle and discrete – a chance to work… everyone knows he is putting pressure on influential players.

President Trump’s Tweet on US troops’ presence in the Middle East showed a new vision on the geopolitics of energy: he has slashed geopolitical risks altogether, but so far the market has not reacted accordingly to these words of the US Commander-in-chief… the market should take his Washington Post interview accordingly. US oil production is at its highest, and Mideast oil consumers should not worry anymore. Mr. Trump has put an end to political history, geography in just one sentence. A brilliant mind indeed and should be taken seriously… It is now “America First”, regardless of the demand forecast: I increase my oil production and others should be accommodating, making sure that I am satisfied with the price that I pay for my imports.

It was not simply an announcement but even an order that Trump gave to OPEC + leaders on a price target, but first of all he should first show the rest of the world that as President he is able to make the oil industry in his own country agree on a figure for this.

Here one may note that coordination with OPEC is useful for both Trump and President Putin: US production soared thanks to financial speculation; shale came to life; and OPEC lost market share. It is more realistic to understand that OPEC, Russia and shale share the same boat – rather than talking about “Nightmares” as a Bloomberg writer did just a short while ago.

Realities are for OPEC that mixed signals do not help credibility, as in the run up to the last meeting where the “Produce-as-much-as-you-can mode” of October 23rd changed three weeks later to requesting 1.4 mn b/d; and money-strapped OPEC members with dwindling production figures, will face tough realities to fulfil their external debts and provide their respective national economy with the minimum acceptable public spending. So, there is no reason for OPEC to celebrate any 2018 achievement, especially considering that China and the US have agreed on a “90 days ceasefire” in the trade war. Here OPEC is the immediate victim. China is the number one importer of US crudes, and the first VLCC loaded with US oil is now sailing to China. OPEC is losing market share and credibility to provide market stability – and expecting Russia to cut production. Anyway, ever increasing US production has only been possible through OPEC’s ill-advised price defense policy.

Spare capacity in GCC Countries are now around 1mn b/d higher than in Summer and there is no oil supply shortage at sight. Prices, therefore, could ease further. Slow demand growth, supply glut and a rather bearish financial market might severely hit cash stranded exporters. Furthermore, “spare capacity is expected to fall to a multi-year low” – around 1.3 mn b/d was announced on 22nd October… 3 mn is a realistic figure for Christmas.

 

 

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