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Keeping OPEC awake in American onslaught

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By Sonny Atumah

The Organisation of the Petroleum Exporting Countries, OPEC,175th Ordinary meeting holds on Thursday, December 6, 2018, at its headquarters in Vienna, Austria. OPEC’s 15 members control 35 percent of global oil supplies and 82 percent of proven reserves.

OPEC

This ordinarily affords OPEC a level of influence over the world economy.  This meeting will review the November 2016, Declaration of Cooperation that spiked global oil prices up by 40 percent with the Brent crude international benchmark that hovered near US$75 per barrel.

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That oil markets cooperation between OPEC and 10 non-OPEC nations was under a joint pledge to cut production by 1.8 million barrels per day, bpd (1.2 million bpd from OPEC and 600,000 bpd non-OPEC). OPEC believe it reinvigorated oil prices that was suffering from a global economic slowdown and deluge of U.S. shale oil largely to Venezuela’s economic implosion and supply disruptions in Libya.

In 2014, OPEC led by Saudi Arabia, flooded the oil market to force out shale producers out of business. The surviving producers from the Permian Basin and the New Mexico though were leaner became more resistant and invulnerable that they can survive even if crude prices fall as low as US$30 a barrel.

It was predicted that the American sanctions on Iran, production losses from Venezuela and American shale plateauing last summer would make OPEC control the market. But the United States in August recorded nearly 3 million barrels in crude and other oil liquids the largest annual increase in oil production in over nine decades.

Its total output of 15.9 million barrels a day was more than Russia or Saudi Arabia. The United States crude supplies including shale output have been increasing on world markets as demands slowed down among consumers including the slowing economic growth in China; the number one global crude oil importer. Again, pipeline bottlenecks in the Texan hub of American shale would have made OPEC have a free ride.  These have not happened as the Permian producers add three pipelines in Gray Oak, Cactus II, and Epic to distribute about 2 million barrels a day in 2019.

Has OPEC lost steam in its strategy of rebalancing global oil supplies? OPEC might have been caught off guard that prices of international benchmark Brent crude which reached US$85, a four-year high in October, has fallen by more than 20 percent and continued to fall almost precipitously.  Global benchmark January Brent, slid US$3.80, or 6.1 percent, to US$58.80 a barrel. Brent shedding nearly 12 percent last week.

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The Wall Street Journal reported that OPEC may be considering a production cut in which Saudi Arabia may take about 1 million barrels a day of production offline, a reversal of the production increase undertaken in anticipation of the U.S. sanctions against Iran. Observers believe that Saudi Arabia agreeing to pump more crude oil into the global market as a recompense for Washington to abandon the manhunt for the real killers of Jamal Khashoggi in the Saudi Consulate recently may have turned out to be OPEC Achilles heel.

Oil inventories have been rising, with a 4.9 million-barrel rise in U.S. crude oil stocks. The Energy Information Administration reported that for the night week domestic crude oil supplies rose by about 1.9 million barrels.

The OPEC November 11, 2018 meeting in Abu Dhabi on oil supply and demand fundamentals predicted glut on world markets.

The option left for OPEC is to adopt a new strategy on how to adjust production to rebalance supply in 2019. In cutting production, the resultant higher prices tilt towards United States shale producers that may have market share advantage. OPEC is facing a big challenge of being between the devil and the deep blue sea.

Most OPEC members depend on crude to fund deficit budgets meaning that they need higher crude prices to make money than U.S. producers. OPEC would not allow prices to fall. The sanctions on Iran has really not reduced inventory as surprisingly the United States granted temporary waivers to eight major importers: China, India, Japan, South Korea, Turkey, Taiwan, Italy and Greece until the end of April 2019.

The scenario goes beyond OPEC for a meaningful decision on a second retreat in three years on pricing and market share from booming American production. The U.S. will become a net oil exporter very soon. Solution may come from the super cartel, OPEC+ made up of OPEC’s 15 members and Non-OPEC allies including Russia, Mexico and Kazakhstan that would meet in Vienna on December 7.

Any hope for OPEC? OPEC may be in for it but the shale boom may be short-lived for America. The International Energy Agency, IEA, position is that the American shale or tight oil may account for about 75 percent of production increase in the near future, but may not last beyond the mid-2020s when output will plateau for a decline by about 1.5 million bpd in the 2030s. It implies that the OPEC conventional oil may still be key to meeting demand growth thereafter.  In the near term how will oil dependent nations survive?

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