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Page added on November 2, 2015
OPEC’s big favor to the world of oil
OPEC’s spare production capacity is estimated by the US Energy Information Administration at 1.54 million b/d, a mere 180,000 b/d above the level reached in 2008 when oil prices hit their record high. But don’t panic! Oil inventories are at very high levels. The International Energy Agency puts global oil stocks at 147 million barrels, which it notes could notionally deliver 1.6 million b/d for just over 90 days in the event of a major supply disruption.
Meanwhile, the North Dakota Department of Mineral Resources reports that the number of drilled but uncompleted wells in the state hit 993 in August. According to Platts unit Bentek Energy, these wells if brought on-stream would add 591,000 b/d to Bakken crude production (again, notionally).
This represents a major change in the oil market. Spare capacity is no longer solely held by OPEC, but is split between the Middle East, principally Saudi Arabia, and the drilled but uncompleted wells in US shale plays. Moreover, this is backed by the growth in oil inventories, which is not just a function of the market’s current oversupply, but also structural, represented by the construction and filling of storage capacity in China, which the IEA says accounts for 60 million barrels of the 147 million barrel total.
It is an important change. OPEC’s spare capacity has a number of functions. It demonstrates visibly that the organization has the means to change output levels at short notice i.e. that its market interventions are effective. It acts as a disincentive to non-OPEC investment and to some extent helps to protect OPEC’s market share. And it provides OPEC with legitimacy. OPEC has invested — at considerable cost — in assets that could be used in the event of a supply disruption. OPEC was doing the world a favor, even if its spare capacity was also one of the tools in the cartel took kit.
OPEC’s current course, if taken to its logical conclusion, is that it runs down its spare capacity to zero, in the process taking market share from non-OPEC producers. The US’ uncompleted wells are a temporary phenomenon. How and when this spare capacity is used is no longer the strategic decision of a cartel, but a direct function of price. Over the longer-term private companies have no incentive to invest in non-productive assets.
Assuming that the market eventually rebalances — that investment and then supply falls causing prices to rise — it is the uncompleted wells that will come on-stream first. Restoring the investment momentum behind deepwater drilling or Canadian oil sands to a point where supply starts to rise again will take years, just as those modes of oil production are taking time to slow down in the face of low prices.
But where will the spare capacity be then? Where will be the buffer that protects the world’s oil supply from events like the Iran-Iraq war, the rise of Islamic State or implosion of Libya?
Better keep building storage because while OPEC may have been serving its own interests, it really was doing the world a favor. And better keep investing in shale unless the market wants the volatility implied by an industry where the majority of production is still victim to the boom and bust of a long and slow investment cycle. Few will rue the end of OPEC’s cartel behavior, but they might also miss its spare capacity.
18 Comments on "OPEC’s big favor to the world of oil"
rockman on Tue, 3rd Nov 2015 8:12 am
“And better keep investing in shale unless the market wants the volatility implied…” Drilling decisions are not based upon any desire to minimize volitility. They are based upon economic evaluation.
As far as “cartel” actions it’s basic function is to control production rates in order to max oil prices. In that sense there is no effective cartel today…just as there has not been often during the entire history of OPEC.
Kenz300 on Tue, 3rd Nov 2015 8:45 am
Banks have stopped lending to high cost providers…..
BobInget on Tue, 3rd Nov 2015 8:48 am
It was in fact a bomb. No missile could go undetected by US satellites.
CNN)[Breaking news update 8:03 a.m. ET]
A U.S. military satellite detected a midair heat flash from Metrojet Flight 9268, which crashed Saturday, a U.S. official told CNN.
“A U.S. intelligence analysis has ruled out that the Russian commercial airplane was struck by a missile, but the new information suggests that there was a catastrophic in-flight event — including possibly a bomb, though experts are considering other explanations, according to U.S. officials”.
While Putin and friends are downplaying terrorist plots it has become obvious a bomb was planted on a Russian airliner.
Like the US Russian military is like a hammer.
Every crisis a nail.
IOW’s watch for another super bloody escalation.
BobInget on Tue, 3rd Nov 2015 8:53 am
Oh, I forgot. This site is about oil gluts.
Sorry.
http://www.livecharts.co.uk/MarketCharts/crude.php
tahoe1780 on Tue, 3rd Nov 2015 10:52 am
Did the U.S. satellite detect a missile approaching and detonating near MH17?
GregT on Tue, 3rd Nov 2015 2:44 pm
“Did the U.S. satellite detect a missile approaching and detonating near MH17?”
Nobody knows. The US hasn’t officially released any military information on flight MH17, but you can bet if they could have proven that the Russians were responsible, they would have. The only info that the US released was from digital globe. The Russians, on the other hand, publicly released all of their defence satellite and radar data within days. Strange that.
Jeff on Wed, 4th Nov 2015 4:41 am
“The International Energy Agency puts global oil stocks at 147 million barrels”
Wait a second, didn’t the latest EIA Report advertise that the US alone has >450 Million BBLs in Commercial Storage in addition to 695 Million BBLs in the Strategic Petroleum Reserve???
So is the US Government lying about their Crude Oil Inventories in order to keep the price of oil down??? Or are the IEA’s estimates off by an order of magnitude???
Something smells fishy…
Jeff on Wed, 4th Nov 2015 4:54 am
“Did the U.S. satellite detect a missile approaching and detonating near MH17?”
The warheads on surface to air missiles are not large enough sever the aluminum frame of a large passenger airliner… Basically, the explosion was too powerful for it to anything other than a bomb – a bomb that probably exploded in the baggage compartment…
Blowing a hole in the top, bottom, or side of the airbus could have been the work of a missile, but for the aluminum frame to have been cut in half, no StA missile can do that… The number of dismembered body parts that were found also suggest that it was one heck of an explosion. Again, too big to come from a StA missile…
Jeff on Wed, 4th Nov 2015 5:12 am
I think all the morons like Art Berman who pushed Obama’s agenda, selling the US on the idea of an oil glut are on the brink of eating crow…
marmico on Wed, 4th Nov 2015 6:01 am
October 2015 U.S. commercial crude oil and product stocks are
~175 million barrels higher than October 2014.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WTESTUS1&f=W
It would take about 12 months at a 500,000 barrel per day drawdown for commercial inventory to settle at historical levels.
Contango equals inventory build, backwardation equals inventory draw. The market is in contango.
http://www.eia.gov/finance/markets/balance.cfm
Jeff on Wed, 4th Nov 2015 9:29 am
Marmico; So I take it that you believe that IEA’s estimates of 147 Million BBLs of crude in storage is incorrect by an order of magnitude…
—
If you believe that the EIA is giving you accurate numbers then I cannot help you…
ghung on Wed, 4th Nov 2015 10:06 am
Jeff said: “The warheads on surface to air missiles are not large enough sever the aluminum frame of a large passenger airliner…”
The A-321’s airframe is primarily made of composites. Also, few surface-to-air missiles, especially the ones terrorists may have, won’t reach 30,000+ feet. I agree that a bomb on board was the likely culprit. Not sure how composites react to explosive decompression, as compared to an aluminum airframe, but at over 30,000 feet, either would be catastrophic.
ghung on Wed, 4th Nov 2015 10:08 am
Edit: …few surface-to-air missiles, especially the ones terrorists may have,
won’twill reach 30,000+ feet…marmico on Wed, 4th Nov 2015 11:00 am
So I take it that you believe that IEA’s estimates of 147 Million BBLs of crude in storage is incorrect by an order of magnitude…
No. Always go the source document. The IEA reported on October 13 that August 2015 OECD crude oil stocks were ~150 million barrels higher than the historical average with the preliminary September stocks yet higher again.
Remember that his board is populated by blathering, blustering blowhards.
The growth rate of OECD crude oil consumption going forward is de minimus. Effectively flat since 2000.
marmico on Wed, 4th Nov 2015 11:07 am
Ooops, busted link for the source document.
Jeff on Wed, 4th Nov 2015 1:14 pm
Good point…
It looks as though the world has run out of oil anyway; however, so the 150MM BBL is probably not that far off, if it is all in Saudi, Iran, & China…
Largest US pipeline for refined produts shut down yesterday due lack of product (diesel fuel) to pump… Of course, they blamed it on the weather, but a little rain has never stopped it before…
Jeff on Wed, 4th Nov 2015 1:32 pm
“The A-321’s airframe is primarily made of composites”
A significant amount of their airframe is made of composites, which would likely not fare too well in the even of an explosion…
The part of the plane that I am interested in the plane’s backbone… The top, bottom sides, everything be blown off, but there would still be an aluminum frame that served as the backbone of the plane…
The explosion either had to be very large, or to could have been position & shaped in such a way as to cut/sever this frame…
Interesting, I did not realize that composite materials of that caliber were available 5-20 years ago…
JuanP on Thu, 5th Nov 2015 7:18 am
As far as I am concerned if you want to believe that OPEC has any spare production capacity, that is your problem. IMO, OPEC has no spare capacity at all at this time.