Oil prices have been trending upward, both global benchmark, London-traded Brent and U.S.-benchmark, NYMEX-traded West Texas Intermediate (WTI), just a little more than week after OPEC said it would agree to agree to cut production at its next meeting in November.
On Thursday, oil prices reached back in the $50s range for the first time since June, seemingly finding a much needed floor. On Friday, Brent dropped, but only marginally, down just 0.5% to $52.26 a barrel, while WTI crude settled down 63 cents at $49.81 amid profit taking.
The 14-nation oil exporting cartel, led by de facto leader Saudi Arabia, agreed on the sidelines of an energy forum in Algiers on September 28 to collectively cut oil production as much as 740,000 barrels per day (bpd), in an effort to prop up bearish oil prices which have dropped around 60% since mid-2014.
But it won’t last. There are too many variables to consider which are out of OPEC’s control.
First, OPEC now represents just 40% of global oil production and will need major non-OPEC producers to also agree to a production cut to have any real impact.
Will that happen? It’s anybody’s guess, but don’t count on it. Yet, OPEC, particularly Saudi Arabia, who is a master at spinning news for the global press that hangs on its every word want us to believe it will actually happen.
Algerian Energy Minister Nouredine Bouterfa told local Ennahar TV that OPEC and, more importantly, non-OPEC members would hold an informal meeting in Istanbul on October 8-13 to discuss how to implement the Algiers deal, though he didn’t give details about who would attend.
He left that up to another OPEC member, Venezuela (one of the so-called OPEC have-nots) who has suffered the most since Saudi Arabia agreed in November 2014 to ramp up production in order to protect market share and drive U.S. shale oil producers out of business.
On Thursday, Venezuela’s Oil Minister said that oil ministers from Algeria, Gabon, Qatar, Saudi Arabia, the United Arab Emirates, and Russia (the world’s largest oil producer, now producing 11 million bpd, a post-Soviet high) would participate, as would Venezuela’s own oil chief, Eulogio Del Pino.
OPEC Secretary-General Mohammad Senusi Barkindo also said that he is planning to meet Russian Energy Minister Alexander Novak for “consultations” on the sidelines of the energy summit in Istanbul, according to a person familiar with the meeting.
Concessions
In the past, OPEC members Nigeria, Iran and Libya have all remained cool to either a production freeze or any actual production cuts. It was Iran that caused an April OPEC production cap deal to fall apart by its non-attendance, while both Nigeria and Libya have been roiled in domestic havoc impacting their oil sectors as much or even more than the two-and-a-half year roil in oil markets.
However, OPEC seems to have all of their bases covered this time, concluding that Nigeria, Iran, and Libya should to be able to maintain or possibly even increase their production levels as Iran recovers from sanctions and both Nigeria and Libya grapple with domestic political turmoil. Yet, that creates another problem, since other OPEC members who agree to the deal would have to make even larger cuts to compensate.
Then comes the matter of enforcement. Who would make sure that OPEC members stick to any production cut agreements? Nobody essentially. It’s common knowledge that OPEC members in the past have not abided by production agreements and there is no way to either monitor or enforce compliance.
U.S. production wild card
Even if members did stick to a deal, an increase in oil prices for a sustained period (OPEC’s goal) would give more incentive for U.S. shale oil producers to ramp up more production, while some that were idled would come back.
OPEC has to somehow try to avoid this scenario, effectively increasing prices but keeping them below $60 per barrel, the level that many analysts claim U.S. shale oil production would come roaring back.
Can OPEC micro-manage prices so precisely? Likely not. With Russia’s help could the cartel pull it off? Not likely again. The problem is still stubborn U.S. shale oil production.
For markets to be re-balanced, and most importantly for oil inventory draws to begin, would require more than an OPEC and Russian agreement. Even though U.S. crude oil inventories pulled back last week by 3 million barrels, it’s not close to being enough.
In fact, U.S. shale oil producers, who have managed to decrease operating costs and at the same time produce more oil from existing wells, are forecasted to actually increase oil output again. Last week, Goldman Sachs projected that U.S. tight oil production would increase as much as 700,000 bpd by the end of 2017, effectively erasing all of the oil production the U.S. lost over the past two-and-a-half years.
Though OPEC is spinning news and influencing markets with declarations of possible oil production cuts, even minimal ones that would not change oil markets fundamentals anyway, the cartel can’t shut down U.S. oil production.
Saudi Arabia has already tried and has hurt itself almost as much as it did U.S. shale producers. The Kingdom ran a record high budget deficit last year of $98 billion, and is forecasted to run a deficit this year of $87 billion due to the drop in global oil prices.
While markets enjoy a brief uptick in prices and some analysts and pundits rejoice prematurely, others however can see through the smoke screen.
The Wall Street Journal said on Wednesdaythat a survey of 13 investment banks predicts that Brent will average just $56 a barrel next year, down by more than a dollar from last month’s survey, despite OPEC’s production cut announcement last week.
The group of banks also expects WTI to average $54 a barrel next year, also down a dollar from the previous survey.
J.P. Morgan said that “OPEC is arguably running out of time to act to stabilize markets and, more importantly, create some cushion to accommodate any negative demand shocks that might emerge in the coming quarters.”
