Peak Oil is You
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Page added on December 18, 2015
OPEC Members In Jeopardy, How Long Can They Hold Out?
Where’s the floor? Is this the new normal? Answers have proven elusive and predictions unreliable as the oil market continues to lurch to and fro, though mostly down; oil is at an 11-year low.
Looking forward, bears and bulls abound – panicky and glued to OPEC’s every, somewhat disjointed move. For its part, the oil-producing cartel is grappling with an existential crisis. To be sure, OPEC isn’t dead and it hasn’t lost its market moving capabilities, but disagreements over how to apply those means – and a creeping suspicion that OPEC and non-OPEC pain thresholds are not mutually exclusive – have fractured the group.
As it stands, OPEC is producing roughly 31.70 mbpd – up 1 percent from November, and more than 5 percent from a year ago. Record volumes from Saudi Arabia and Iraq have buoyed production to date, but Iran’s oil industry is heating up as the country, and global investors, prepare for life after sanctions. According to OPEC’s 2016 demand projections, the cartel’s supply surplus could reach 860,000 bpd if current production rates hold.
Globally, signs of the glut are everywhere, and growing. In the U.S., crude inventories are at their highest level in 80 years; stockpiles are at 97 percent of capacity in Western Europe; and OECD oil inventories are more than a quarter of a million barrels above their five-year average. Onshore crude storage space may run out in the first quarter of 2016.
As a result, OPEC revenue is down some $500 billion a year, and counting. Saudi Arabia’s troubles are well documented – the kingdom’s budget deficit is expected to come in around 20 percent of GDP this year, with a similar outlook for 2016. The International Monetary Fund estimates that Saudi Arabia will run out of cash in five years barring any oil price turnaround or drastic spending changes. That being said, they have cash – as do Kuwait, Qatar, and the United Arab Emirates, who possess relatively large fiscal buffers.
Elsewhere, Venezuela is caught between China and a hard place. Inflation is in triple-digit territory and the country’s economy is primed for a world-worst 10 percent contraction this year. Recent elections have paved the way for major political reforms, but the country has few weapons in its arsenal to combat a prolonged period of low prices. Chinese financing has become a precarious crutch against stagnating production, and we can expect to see more of it as Venezuela feverishly attempts to boost production of heavy Orinoco oil.
Speaking of Chinese financing, OPEC minnow Ecuador owes the Asian giant upwards of $5 billion. Ecuador is faring better than Venezuela – it recently honored a bond payment in full for the first time in its history – but the country’s long-term relationship with China is a case study in toxic friendships. Low oil prices, a strong dollar, and faltering diversification efforts, further limit President Rafael Correa’s hedge opportunities against both Chinese money and a disgruntled populace at home.
Back across the Atlantic, top African producers Algeria, Angola, and Nigeria have an average fiscal break-even price of nearly $110 per barrel; and all three have called for production quotas to be restored amid tumbling government revenues. Planned spending cuts, decent foreign reserves, and little foreign debt ease Algeria’s struggle relative to its OPEC brethren, but its massive welfare program is worrying long-term. For its part, Angola is expanding its long-term sales deals with China, using its oil as collateral in return for infrastructure improvements.
Nigeria is in perhaps the most dire straits of the group – Libya aside. President Muhammadu Buhari would like to extract more revenue from the nation’s vital offshore oil fields, but his untimely review of the fiscal terms has sparked tensions among already anxious investors. The ongoing reform of the oil industry has already cost Nigeria more than $50 billion in investments, and threatens to deter some $150 billion more over the next 10 years. In all, Nigeria’s oil output could drop as much as 15 percent by 2017 as a result of cash shortages and investment gaps. Long-term, the focus is on the state’s non-oil economy, particularly its solid mineral sector, which has great potential for growth.
The Saudi strategy has yet to bear itself out, but early indications suggest it is generating returns. Non-OPEC supply is expected to suffer its steepest decline in two decades in 2016, at a drop of nearly 0.5 mbpd. Moreover, U.S. shale producers are among the hardest hit. Oil production across the seven most prolific shale plays is expected to plummet a combined 116,000 bpd in January 2016.
Still, the strategy is not without sacrifice, and several OPEC members are struggling to find – and, more importantly, endure – that magical balance between non-OPEC pain, market share retention/growth, and self-inflicted damage. Their tipping points are nearly impossible to predict, but there will be more losers than winners in this game of brinksmanship.
21 Comments on "OPEC Members In Jeopardy, How Long Can They Hold Out?"
makati1 on Fri, 18th Dec 2015 5:46 pm
We are not yet in free fall, economically speaking, but the printing press safety chute many hope will work, is full of holes and the cords are frayed to mere threads. Interesting times. Buckle up!
Bob Wastes on Fri, 18th Dec 2015 7:20 pm
Its completely stupid thinking on OPECS part though because eventually prices will have to rise again and guess what, the U.S. has all this oil in the ground..
rockman on Fri, 18th Dec 2015 8:06 pm
Bob – A question: when the inflation adjusted price of oil fell from $107/bbl by more than 75% do you think OPEC did it on purpose? IOW did OPEC increased prices in the late 70’s in order to drive the global economies into a recession that reduced oil demand significantly? And having intentionally cratered oil prices into the $25 to $40 per bbl range for about 15 years they wanted to hurt oil development by other oil drillers even more so they drove the price down another 50% in 1998.
But then 10 years later OPEC (really the KSA) had a huge change of heart and allowed oil prices to increase to over $100/bbl. Which allowed the US shale players to increase our rate to an almost a new record level. But then in a complete reversal of their generosity they plunged oil prices down again just like they did in the early 80’s.
That’s the general tale one has to buy if one beleives OPEC and the KSA decide what price oil sells for. Or, alternatively, it’s the consumers who decide what they’ll pay for oil.
Everyone is free to choose which story makes more sense.
makati1 on Fri, 18th Dec 2015 9:53 pm
Rockman, ‘sense’ is what some here have little of. As you said, you can sell oil for $100 per barrel, but if the consumer cannot pay that price, it is only worth what the consumer can/will pay. Maybe $10.
The same is happening to those who bought/built big homes and paid huge mortgages for decades so they could sell at a huge profit when they retired. That $500K house may only have a buyer at $50K when it is time to sell. Or zero buyers. Not to mention high maintenance, insurance and tax costs forever if they still own it.
BAU is over. Nothing is for sure except taxes and death.
JuanP on Sat, 19th Dec 2015 7:02 am
Rock beat me to it! OPEC hasn’t decided anything. It is every man for himself.
The one and only thing OPEC countries have agreed to in the last few years was to raise their production quota to 31.5 mbpd from the 30 mbpd where it was before their last meeting. This is the first thing they have agreed to in years. This decision was an easy one since it didn’t change anything for members and didn’t require any sacrifices on their part, it is just admitting what they were already pumping and good for OPEC’s credibility, which has been pummeled lately.
MidnightCommentator on Sat, 19th Dec 2015 7:12 am
Alternative energy has turned the corner and is never going to look back. The oil industry knows this. Macroeconomically speaking cheap oil should lead to stronger economies, shifting the supply curve downward due to the lowered cost of production. But it isn’t happening except for in the USA though wage stagnation is holding back the otherwise desirable effects of low unemployment rate.
Bob Jones on Sat, 19th Dec 2015 7:30 am
As Bob Wastes said, the US has a massive amount of oil in the ground ready to be pumped at any time. And the cost of pumping that (horizontally fracked) oil just keeps coming down. There is a huge number of DUCs ready to go the minute the price starts to stabilize. OPEC has done nothing but kick the can down the road, the Saudis have seriously overplayed their hand, and things will get very interesting geopolitically in 2016. I am a buyer at these 11-year lows.
shortonoil on Sat, 19th Dec 2015 7:46 am
One thing, at $35.55, we can say for sure is that OPEC is now pumping every single barrel it can get out of the ground. It looks like Peak OPEC is here. The question is not “how long they can hold out”, the question is how long before they collapse? With the highest quality fuel producing crude left on the planet, the remainder of the world will be left scratching to make up the difference!
JuanP on Sat, 19th Dec 2015 8:13 am
I agree with Short. OPEC is pumping as much oil as it can and this won’t last too long. OPEC’s spare production capacity is no more. Next year will be extremely interesting to live through for those of us who are into these matters.
makati1 on Sat, 19th Dec 2015 9:16 pm
JuanP, I agree. 2016 could be the turning point for many events we are watching here. The next few years will very likely chart our species future or lack of.
Boat on Sat, 19th Dec 2015 10:34 pm
short,
Peak OPEC oil is not here, maybe. Kinda depends on geopolitical events in the Middle East like in Iraq which has a lot more oil to produce. Iran which could add 3-5 mbpd over the next few years. Liberia whose competing factions just met in Italy to attempt peace. They could add 1 mbpd easily. Nigeria who if was more peaceful could add much oil. The list goes on. Venzuwala who if better managed could produce more oil. Then non OPEC American frackers who could easily add drilling crews if oil recovers to $70 oil. Lot’s of oil out there. The peak is in our distant future, not immediate.
Apneaman on Sat, 19th Dec 2015 11:05 pm
Boat the hedger. I thought you were all about taking a stand and picking a side – making a manly and firm prediction?
Lets break your comment down for what it really is….
Absolute certainty at the beginning – “is not”
Hedging in the middle – “maybe.” “Kinda” “which could” “They could add” “could add” “who if” “could produce” “could easily add” “if oil ”
Absolute certainty at the end – “not immediate.”
what we have here is a bullshit sandwich.
Apneaman on Sat, 19th Dec 2015 11:06 pm
SuperSized
GregT on Sat, 19th Dec 2015 11:51 pm
Boat,
Now’s a good time to go all in with your ‘dollar cost averaging’.
shortonoil on Sun, 20th Dec 2015 10:22 am
“I agree with Short. OPEC is pumping as much oil as it can and this won’t last too long. OPEC’s spare production capacity is no more.
The EIA is projecting about a 1 mb/d decline in US production for 2016. By our calculations it will require a 4.5 mb/d cut to bring prices back to this curve, which would be about $56 max in 2016:
http://www.thehillsgroup.org/depletion2_022.htm
It doesn’t look that there is going to be much price relief for producers this coming year. Investors will get tired of the “this is only a cycle, and prices are going to go back up, and save everyone” story. They will pull their support that has kept much of the high cost portion of the industry functioning to date. By the time that has hit, the maximum price will have fallen into the $40 range in 2017. Many of OPEC’s sovereign wealth funds will have been tapped out, and they will have to rely on cash flow. Social programs will have to be slashed, and the Middle East is likely to explode. The consequences of 10s of millions of people attempting to live on a sand dune is going to become self evident!
shortonoil on Sun, 20th Dec 2015 10:37 am
“Iran which could add 3-5 mbpd over the next few years.”
Iran’s fields have been left in disrepair for the last 30 years, and it will require $100s of billions to rejuvenate them. At $35/ barrel they are going to have one hell of a time raising that kind of money. It seems likely that the FED is waiting with baited breath to finance them; as soon as they have bailed out the insolvent US banking system. Those dreams you are experiencing are more likely to turn into nightmares, than images of Sugar Plum Fairies.
marmico on Sun, 20th Dec 2015 12:41 pm
The EIA is projecting about a 1 mb/d decline in US production for 2016. By our calculations it will require a 4.5 mb/d cut to bring prices back to this curve, which would be about $56 max in 2016.
Bullshit with your sugar plum curves.
shortonoil on Sun, 20th Dec 2015 1:00 pm
Looky, looky – marmi has got a new Ouija Board. Bet he was heart broken to get rid of his 1940’s vintage Houdini board.
marmico on Sun, 20th Dec 2015 1:16 pm
You are a $59.99 fuctard!
Did you get your bullshit in a Walmart store for the sugar plum season?
Apneaman on Sun, 20th Dec 2015 2:11 pm
marmi, when I first came around about 18 months ago, I remember how your vile comments were regularly interspersed with with little jokes, humorous links, winky emoticons and attempts at communication. Davy even called you charming. I remember thinking WTF? Short pointed out last week that oil has gone down for 19 consecutive months (a record) and we are all aware of the other commodities tanking and mass layoffs, etc. After the first 6 months of decline you disappeared for a time and since you returned your comments have progressively gotten angrier and more vicious. No more little jokes or emoticons – just rage. It is what it is. We all want to be right, win the argument and score the status points but there comes a point when one needs to accept that one’s worldview needs adjusting or maybe thrown out altogether. I once believed that human and technological progress was inevitable and some other bullshit as well. It was the flavor of indoctrination that worked on me. Yours is the econ 101 fantasy. They are both bullshit. They just make this shit up as we go along ya know.
onlooker on Sun, 20th Dec 2015 2:34 pm
darn right indoctrination. Maybe this will open Marmi’s eyes.
https://www.youtube.com/watch?v=Xbp6umQT58A
the story of our Enslavement.