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Page added on June 2, 2015
How Long Can OPEC Maintain Its Current Strategy?
The six-month clock is up. OPEC is convening this week in Vienna, as it does every six months, to discuss and decide on how the group will coordinate.
The November 2014 meeting was one of the most widely covered in years. After leaving its collective output quota unchanged for several consecutive meetings in a row, much of the world watched for a major policy change. The glut of oil had led to a crash in prices, falling from well over $100 per barrel, down to the $70 range. As it had in the past, surely the cartel would pull the production lever downwards, switching off a million barrels per day or so in order to stop the bleeding?
That decision never came. In a move that shocked the oil markets, and enraged many of OPEC’s own members, production levels were not touched. Saudi Arabia looked into the history books and realized what happened the last time they cut production during a glut. In the 1980’s, prices did not recover, and Saudi Arabia merely lost market share and revenues.
Not eager to make the same mistake, this time they went full speed ahead, fighting for every piece of the market it could capture. Saudi Arabia has even boosted production by 700,000 barrels per day since then, increasing output to 10.3 million barrels per day as of April 2015.
As it quickly became clear, Saudi Arabia hoped to force out higher-cost producers (i.e. US shale) and maintain market share, allowing prices to eventually adjust upwards on the backs of others.
So what should we expect from OPEC’s upcoming meeting on June 5? More of the same. Having made the decision to fight it out, there is almost no reason to back off now. US shale producers have hung on longer than many anticipated. OPEC has inflicted a lot of damage across the US shale patch, but it hasn’t yet struck the deathblow that it had wanted.
Rig counts have fallen by 1,000 (more than 50 percent) since October 2014, production has largely come to halt (although not really declined), and fewer wells are being drilled. Importantly, a few smaller companies have gone bankrupt, and others are struggling under mountains of debt. That portends a larger adjustment in the months ahead, but for now, the market is in limbo.
OPEC’s strategy could still work, but will need more time. That points to a stay-the-course approach heading into the June meeting and beyond.
Still, it is not clear how long OPEC members can hold out. Many are not as well endowed as Saudi Arabia, nor do they have the massive rainy day fund that Riyadh does. Several members – most notably Venezuela and Iran – loudly called for a cut in output last time around. Their arguments didn’t win over Saudi Arabia in November, and they won’t again in June, but at some point the pressure could mount.
The Wall Street Journal reported in May that OPEC is starting to come to grips with the possibility that oil prices could remain below $100 per barrel well into the next decade, a troubling prospect for oil-producing countries that had become used to the super profits associated with three-digit oil prices, and many have budgets that only breakeven in that range.
An internal OPEC report sees oil prices at $76 per barrel in 2025. And that is the group’s most optimistic scenario. It also considers the possibility that oil drops below $50 per barrel in the 2020s. $100 oil does not figure into the group’s considerations.
OPEC disputed that it put together such a pessimistic outlook, but if the WSJ report is correct, the implications would be profound.
The WSJ believes that OPEC, under this scenario, would consider returning to production limits in order to prop up prices. If prices stayed low, the group probably would not be able to produce flat out and wait out US shale for a decade. Internal pressure would be too great.
For the June meeting, however, the Saudi strategy should carry the day. November’s meeting could be a lot more interesting though. If prices don’t recover, and US shale is not making big cut backs, the grumbling within OPEC could grow louder.
11 Comments on "How Long Can OPEC Maintain Its Current Strategy?"
Plantagenet on Tue, 2nd Jun 2015 2:31 pm
OPEC giveth the oil glut, and OPEC can taketh away. In the 70s when OPEC was mad at US policy OPEC started an oil embargo. Now, when OPEC is mad at US policy, they have engineered an oil glut.
nony on Tue, 2nd Jun 2015 2:51 pm
Drill baby drill. Peakers were wrong. Hahaha. Oh check out Saudi production. So much for staniford.
J on Tue, 2nd Jun 2015 2:55 pm
Plant, what do you think would happen if we allowed the oil producers to back off of production now?
Oil production would drop and peak oil would be official. That could shake people’s confidence in the system, which would not be good.
So the UK and US has ordered maximum productions to kick the can. The Saudis will do what Kerri tells them to, because we supply them with all the arms.
Apneaman on Tue, 2nd Jun 2015 3:04 pm
Since it all comes from Rupert Murdoch’s wall street journal it must be gospel.
GregT on Tue, 2nd Jun 2015 3:04 pm
J,
You have used two words in the same sentence that are incompatible. Plant, and think. Planter is incapable of rational thought. Planter’s only reason for being here is to stir up shit. A sad, pathetic, moronic, troll. Nothing more.
GregT on Tue, 2nd Jun 2015 3:07 pm
“Drill baby drill. Peakers were wrong. Hahaha. Oh check out Saudi production. So much for staniford.”
Come on Nony, planter may have an excuse, but you aren’t that stupid.
rockman on Tue, 2nd Jun 2015 3:12 pm
“As it had in the past, surely the cartel would pull the production lever downwards, switching off a million barrels per day or so in order to stop the bleeding?’ Memories fade: exactly when did that every happen? Didn’t happen in 1998 when oil hit $17/bbl. Didn’t happen in 2005 when oil hit $60/bbl.
“…production has largely come to halt (although not really declined)” Exactly what the f*ck does that mean? New production has come to a halt? Not with 700+ rigs still drilling.
“The WSJ believes that OPEC, under this scenario, would consider returning to production limits in order to prop up prices.” Again a fading memory? I don’t recall a time when OPEC members cheated on the supposed production limits.
“…the group probably would not be able to produce flat out and wait out US shale for a decade.” Wait out a decade??? Most of the existing shale wells have already declined significantly. And new wells this year will also decline significantly in just a few years. So what would the KSA be waiting 10 years for especially since they are losing almost $1 TRILLION in revenue per year thanks to the lower oil price? Maybe waiting for the US oil patch to disappear? The same oil patch that survived $17/bbl and then just 10 years later recorded the greatest increase in US production ever seen before?
Plantagenet on Tue, 2nd Jun 2015 3:28 pm
@J
Your question doesn’t make any sense. You ask “what would happen if we allowed the oil producers to back off production now”. No one is forcing the oil producers to produce, and no one is stopping from them from not producing so its nonsensical to ask about “allowing them” to back off production. Each oil producer makes his or her own decision about what is economic and desirable for their own company and/or their own country. If oil producers want to stop producing, then they will stop producing.
But back here in the real world, people need to make money and earn a living, so almost all oil producers are continuing to try to produce as much oil as they can, even in the middle of this oil glut.
CHEERS!
PS: for another view of this, check out Rockman and his insights into why US oil producers will continue to produce.
GregT on Tue, 2nd Jun 2015 4:12 pm
Us oil producers are shooting themselves in the feet. If one is foolish enough to believe the oil glut conspiracy, then somewhere between 300,000 and 800,000 extra barrels of oil are being produced daily. If US shale oil producers cut production by the same amount, they could theoretically sell the remaining ~3 million barrels for twice as much. Instead of going out of business.
But of course all of those Ivey league senior executives are too dumb to figure this out, so the imaginary oil glut continues………..
Brent on Wed, 3rd Jun 2015 1:15 am
Then their is this and other oil companies going out of business. Not to mention if they ever raise the interest rate. http://www.fa-mag.com/news/-shale-ionaires–suffering-from-wave-of-bankrupt-oil-drillers-21853.html
rockman on Wed, 3rd Jun 2015 6:42 am
“If US shale oil producers cut production by the same amount…”. Currently the body bags are starting to fill up with companies that aren’t able to survive even while producing flat out. Exactly how many companies holding on by their finger would voluntarily cut production, and destroy themselves for the benefit of other companies?
The Rockman is an oil patch professional with a strong sympathetic streak for his fellow doodle buggers. But cut production to help save the rest of the oil patch? F*ck them!!! The Rockman is currently hunting for weak companies so he can strip off the last bit of flesh from their bones. LOL.
It ain’t personal…just business.