Posts Tagged ‘OPEC’

Is Saudi Arabia giving up on its oil wars?

September 29, 2016

There is a faint whiff of realism entering into Saudi Arabian government policy. They have started to curb public expenditure, they have flagged salary cuts for public employees (not just now but in 2 years), they are desperately trying to diversify their economy. Much of the change has been forced due to self-inflicted collateral damage to their various “oil wars” against shale oil, against Iranian oil and against Russian oil. They have tried to use low oil price as a weapon in their political and ideological battles. But Saudi Arabia has not yet developed the capabilities (and competence) among its indigenous work force to cope without the fat cushion of oil revenues. Without foreign competence and labour, Saudi would collapse and the only thing keeping the foreign competence and labour there is oil money.

It may be a faint hint of an increasing pragmatism that for the first time in 8 years the Saudis and OPEC have agreed to a modest cut in oil production.

It is not the end of the  oil wars but it may be the beginning of the end.

Reuters: 

OPEC agreed on Wednesday modest oil output cuts in the first such deal since 2008, with the group’s leader Saudi Arabia softening its stance on arch-rival Iran amid mounting pressure from low oil prices.

“OPEC made an exceptional decision today … After two and a half years, OPEC reached consensus to manage the market,” said Iranian Oil Minister Bijan Zanganeh, who had repeatedly clashed with Saudi Arabia during previous meetings.

He and other ministers said the Organization of the Petroleum Exporting Countries would reduce output to a range of 32.5-33.0 million barrels per day. OPEC estimates its current output at 33.24 million bpd.

“We have decided to decrease the production around 700,000 bpd,” Zanganeh said.

The move would effectively re-establish OPEC production ceilings abandoned a year ago.

However, how much each country will produce is to be decided at the next formal OPEC meeting in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia.

Oil prices jumped more than 5 percent to trade above $48 per barrel as of 2015 GMT. Many traders said they were impressed OPEC had managed to reach a compromise after years of wrangling but others said they wanted to see the details.

“This is the first OPEC deal in eight years! The cartel proved that it still matters even in the age of shale! This is the end of the ‘production war’ and OPEC claims victory,” said Phil Flynn, senior energy analyst at Price Futures Group. 

Jeff Quigley, director of energy markets at Houston-based Stratas Advisors, said the market had yet to discover who would produce what: “I want to hear from the mouth of the Iranian oil minister that he’s not going to go back to pre-sanction levels. For the Saudis, it just goes against the conventional wisdom of what they’ve been saying.”.

Saudi Energy Minister Khalid al-Falih said on Tuesday that Iran, Nigeria and Libya would be allowed to produce “at maximum levels that make sense” as part of any output limits.

That represents a strategy shift for Riyadh, which had said it would reduce output to ease a global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions earlier this year.

…….. Saudi Arabia is by far the largest OPEC producer with output of more than 10.7 million bpd, on par with Russia and the United States. Together, the three largest global producers extract a third of the world’s oil.

Iran’s production has been stagnant at 3.6 million bpd in the past three months, close to pre-sanctions levels although Tehran says it wants to ramp up output to more than 4 million bpd when foreign investments in its fields kick in. … Saudi oil revenue has halved over the past two years, forcing Riyadh to liquidate billions of dollars of overseas assets every month to pay bills and cut domestic fuel and utility subsidies last year.

It may even be that the Iranians and the Saudis are actually talking to each other.

Opec Countries (image pinterest.com)

Opec Countries (image pinterest.com)


 

Are shale oil and low prices the beginning of the end of the OPEC cartel?

November 24, 2014

Currently US crude is at just above $76 per barrel and Brent oil is at about $80. OPEC members are meeting this week in Vienna and it is thought that cuts to oil production of between 0.5 million and 1.5 million barrels per day (bpd) are possible. The drop in oil prices since June (from around $110 per barrel is due to a glut which in turn is due to over production, large quantities of US shale oil becoming available and simultaneously a reduced demand from China and others. Saudi Arabia is conspicuous by not having made any significant production cuts so far. This could be due to one of 3 reasons:

  1. Saudi Arabia is testing the breaking point for some of the shale oil producers since some of the smaller shale wells probably have a break-even level of around $60-70 per barrel, or
  2. Saudi Arabia and the US are targeting Russia and Iran whose economies are vulnerable and very dependent on the oil price (and the Russians alone would lose some $100 billion in oil revenues per year), or
  3. Saudi Arabia is tired of bearing the brunt of the production cuts and is forcing some of the smaller OPEC producers to take their share of the pain of production cuts.

If cuts of less than 0.5 million barrels per day are made it is thought that the prices are headed down to about $60 per barrel. One analyst estimates that a cut of 2 million bpd is needed to get back up to $80 per barrel. Something in between will be – well – something in between.

I just don’t like cartels and especially when they are state sponsored cartels. So far shale oil production is just from the US, and the OPEC strangle-hold on oil price has yet to be broken. But, over time, I expect this cartel to weaken as other countries produce oil and gas from shale. I remain of the opinion that the OPEC cartel has – no doubt – enriched the oil producing countries but has only done so at the expense of the rate of development of non-producers. OPEC has done the global economy a disservice by holding back the developing countries and the strongest correlation in geopolitics is the link between energy consumption and development (not just GDP but also virtually every development parameter).

It may cause some short term turbulence but in the long run it will be a “good thing” even if oil price were to collapse to below $50 per barrel. Some producers will be hard hit but the net result for the global economy will be positive. So I shall be quite happy if OPEC cannot reach agreement on how much oil production to cut or if they make just a small cut. It is time for some of the the developing countries to get a break from the oil price extortion which has been in place since 1973. The sooner the OPEC cartel is rendered obsolete the better.

Reuters:

Some commodity fund managers believe oil prices could slide to $60 per barrel if OPEC does not agree a significant output cut when it meets in Vienna this week. Brent crude futures have fallen by a third since June, touching a four-year low of $76.76 a barrel on Nov. 14. They could tumble further if OPEC does not agree to cut at least one million barrels per day (bpd), according to some commodity fund managers’ forecasts. ….. 

Yet fund managers and brokerage analysts are divided over whether OPEC will reach an agreement on cutting output. Bathe put the likelihood at no more than 50 percent. Oil prices have been falling since the summer due to abundant supply, partly from U.S. shale oil, and because of low demand growth, particularly in Europe and Asia. As a result, some investors believe a small cut of around 500,000 bpd would not be enough to calm the markets. Doug King, chief investment officer of RCMA Capital, sees Brent falling to $70 per barrel even with a cut of one million bpd.

“With this, I would expect lower prices in the first half of 2015,” he said. If OPEC fails to agree a cut, prices will drop “further and quite quickly”, with U.S. crude possibly sliding to $60, he said. U.S. crude closed at $76.51 on Friday, with Brent just above $80. ……..

The market has been awash with conspiracy theories as to why Saudi Arabia has not already intervened. New York Times columnist Thomas Friedman hinted at “a global oil war under way pitting the United States and Saudi Arabia on one side against Russia and Iran on the other”. Hepworth argued that Saudi Arabia appeared pretty happy with current pricing levels and suggested they were waiting to see where the cut-off point for U.S. production was. “Time is on their side, they can afford to wait,” he said, stressing he was talking months, not years, but added if oil fell below $70 that waiting time “shrinks to weeks”.

Tom Nelson, of Investec Global Energy Fund, said he believed Saudi Arabia had allowed the price to fall to incentivise smaller OPEC producers, which often rely on the biggest producer to intervene, to join Riyadh in cutting output. “They (the Saudis) want to cut but they don’t want to cut alone,” Nelson said, adding that a cut of between one million and 1.5 million bpd should be sufficient to balance the market.

“The market really wants to see that OPEC is still functioning … if there is a small cut, with an accompanying statement of coherence from OPEC that presents a united front, and talks about seeing demand recovery, and some moderation of supply growth, then Brent could move up to $80-$90.”

Massive shale oil reserves in Utah and Colorado

November 14, 2012

The reserves are massive but not yet technologically exploitable. I have little doubt that human ingenuity will prevail and before too long. It is just a matter of time and engineering before this oil starts flowing.

Malthusians must be gnashing their teeth as “Peak Oil”  is pushed back – again – by a few hundred years!!

ABC News:

Drillers in Utah and Colorado are poking into a massive shale deposit trying to find a way to unlock oil reserves that are so vast they would swamp OPEC.

A recent report by the U.S. Government Accountability Office estimated that if half of the oil bound up in the rock of the Green River Formation could be recovered it would be “equal to the entire world’s proven oil reserves.”

Both the GAO and private industry estimate the amount of oil recoverable to be 3 trillion barrels.

“In the past 100 years — in all of human history — we have consumed 1 trillion barrels of oil. There are several times that much here,” said Roger Day, vice president for operations for American Shale Oil (AMSO).

The Green River drilling is beginning as shale mining is booming in the U.S. and a report by the International Energy Agency predicts that the U.S. will become the world’s largest oil producer by 2020. That flood of oil can have major implications for the U.S. economy as well as the country’s foreign policy which has been based on a growing scarcity of oil. …..

The cost of extracting the Green River oil at the moment would be higher than what it could be sold for. And there are significant environmental obstacles. ….. Nevertheless, the federal government has authorized six experimental drilling leases on federal land in an effort to find a way to tap into the riches of the Green River Formation. …….

Getting oil from Green River shale is a different proposition than getting gas and oil from other sites by using the controversial method of “fracking,” fracturing the underground rock with pressurized, chemical-infused water.

The hydrocarbons in Green River shale are more intimately bound up with the rock, so that fracking cannot release them. The shale has to be heated to 5,000 degrees Farenheit before it will give up its oil. ….

“Peak Oil” vanishes and even OPEC bows to shale fracking technology

November 9, 2012

The various catastrophe scenarios based on the depletion of a limited resource (peak-oil, peak-gas, peak-energy, peak-food……….) have a fundamental weakness – they fail to account for human ingenuity and technological advance. History has shown that such Malthusian scenarios just do not come to pass. New discoveries change the availability of the resource, innovation and technology find alternatives and economics changes pricing and the supply/demand dynamics.

Moving peaks

In February this year I posted:

In recent times the development of fracking technology and the discovery of huge deposits of gas-bearing shales together with the discovery of new deep-sea sources of natural gas have pushed the “peak” for gas production beyond the visible horizon and into the distant future (a few hundred years). When – rather than if – methane hydrates become available for gas production, the “peak” will shift further into the future.

Reuters now reports on Opec’s latest World Oil Outlook 

OPEC acknowledged for the first time on Thursday that technology for extracting oil and gas from shale is changing the global supply picture significantly ……

In its annual World Oil Outlook, OPEC cut its forecast of global oil demand to 2016 due to economic weakness and also increased its forecast of supplies from countries outside the 12-nation exporters’ group.

“Given recent significant increases in North American shale oil and shale gas production, it is now clear that these resources might play an increasingly important role in non-OPEC medium- and long-term supply prospects,” the Organization of the Petroleum Exporting Countries said in the report.

OPEC has been slower than some to acknowledge the impact that new technologies such as hydraulic fracturing – known as “fracking” – may have on supply.

Cartels and Hypocrisy. But what happened to ethics?

June 24, 2010

Firms and private cartels get fined but when OPEC countries fix prices it’s OK and when the International Diamond Cartel operates it is found to be beneficial!!!

But ethics don’t get a mention.

EU fines bathroom cartel 622m euros

Seventeen bathroom equipment makers have been fined a total of 622m euros ($760; £510m) by the European Commission for price-fixing. The companies, including Ideal Standard of the US, which was fined 326m euros, formed a cartel for 12 years covering ceramics such as sinks, baths and taps.

The fines of five companies were reduced to a level they could afford. The Commission described the firms’ practices as “very serious infringements of the EU competition rules”.

However, it said its objective was not to force companies in difficulties out of business, and so reduced the fines on five companies. One, Masco of Italy, received full immunity as it was the first to provide information on the cartel.

Public cartels were also permitted in the United States during the Great Depression in the 1930s and continued to exist for some time after World War II in industries such as coal mining and oil production. Cartels have also played an extensive role in the German economy during the inter-war period. International commodity agreements covering products such as coffee, sugar, tin and more recently oil (OPEC) are examples of international cartels with publicly entailed agreements between different national governments.


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