Can OPEC Still Dictate Oil Prices?

November 27th, 2015 by

oil-pumpA surging dollar is adding another verse to the oilfield blues today, as OPEC analysts meet ahead of next week’s policy meeting. Upbeat forecasts of higher supply and lower competition have been questioned by oil ministry officials from member nations. West Texas Intermediate (WTI,) the benchmark for US crude, closed down 95 cents to end at $42.09 a barrel. Brent crude lost 30 cents to close at $45.16.

Despite the pain of the smaller members with no end in sight, large OPEC members, led by Saudi Arabia, are expected to push for the status quo of accelerated pumping.

Gloomy Outlook for 2016

Fifteen months after OPEC initiated a plan to drive US fracking operations out of business, their efforts have barely shown any fruit. Although the Energy Information Agency forecasts US crude production to drop 5% next year, American oil stockpiles still sit near 40-year records. Iran is poised to export 500,000 barrels of oil a day the moment international sanctions are lifted.

Goldman Sachs forecasts a worst-case scenario of $20 oil, though they said prices at such an insanely low level would be temporary. Barclays paints a contrarian picture, expending global oil demand to almost double next. Their analysts are forecasting $60 oil. In a separate report, the Bank of England pins the blame for low oil prices on falling demand. A devaluation of the yuan and stimulus measures by the central bank is expected to strengthen the Chinese economy, and with that, oil demand.

OPEC Pining For Better Days

oil glutVenezuela, which has been subject to food shortages and social unrest, will renew its plea to other OPEC members to cut production enough to bring oil prices back to $88 a barrel. Iran is also pining for the good old days when OPEC controlled global oil prices with an iron fist. Iran’s oil minister called the abandonment of oil production quotas “a historic mistake.”

The biggest problem with bringing back the glory days of OPEC is that the cartel is no longer the main supplier of the world’s oil. Russia is pumping at post-Soviet highs, and shale fracking propelled the US into the position of major oil supplier. If OPEC cuts production without an understanding with major non-OPEC producers, the only thing that will happen will be that OPEC loses market share. The US and Russia will simply fill the gap caused by OPEC cutbacks. Higher prices will also bring mothballed shale fields back into production, and all the pain suffered by OPEC members will be for nothing.

russia-flag-oilWith this in mind, Venezuela’s oil minister is meeting with his Russian counterpart before next week’s OPEC meeting in Vienna. One wrinkle in the Russia/OPEC dynamic is that Saudi Arabia has started selling cut-rate oil in Europe. Ever on the lookout for new markets, the Saudis are selling to Poland and Norway. This has the added advantage of putting the screws to the economy of the nation that is the Saudis main antagonist in the Syrian civil war. Russia gets half of its export revenue from oil, and sells 70% of that oil to Europe.

There are Losers, and There are Winners

While the citizens of smaller OPEC members such as Venezuela, Algeria, and Nigeria  suffer from the oil glut, and the Gulf oil monarchies burn through their foreign reserves, there are a few people quite happy with the status quo.

industry-820031_640At the top of the list is oil refiners, especially those in Asia. The crash in crude prices has been worse than the drop in prices for refined products. This means higher profits for refineries. Another winner is shipping companies that own oil tankers. The oil glut means higher demand for supertankers. A bonus is that many times, the tankers end up parked outside oil terminals, waiting for their turn. The daily rate still applies, whether at sea, or at anchor.

In a case where “trickle down” has actually worked, ordinary citizens are getting the benefit of lower gas and heating oil prices, helping counteract stagnating wages.

Trust In Short Supply

oil-drop-in-barrelOne big reason Saudi Arabia is standing firm against production cuts, is that last time it did so, it came out on the losing end. During the oil glut of the 1980s, OPEC decided to cut production in order to prop up prices, However, it was only Saudi Arabia that really scaled back production. Not only did outside oil producers keep crude production ramped up, Saudi Arabia’s partners in OPEC engaged in a little back stabbing by pumping over quota.

Saudi Arabia is determined not to play the sucker again. The reason that calls for OPEC production cuts are unrealistic, is that the other big oil producers have to also agree to scale back output. That means Russia, the US, and Mexico would have to be on board. The Saudis would also have to be able to trust Iraq and Iran not to cheat.

This is barely within the realm of possibility, so watch for Saudi Arabia and the other Persian Gulf oil monarchies to resist calls from the minor members in OPEC for production cuts.

And hey, if some of these smaller OPEC producers end up dropping out of the oil market, it means more customers for the big boys.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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