Skip to comments.OPEC compromised; Saudi Arabia becomes lone player
Posted on 06/15/2012 3:54:38 AM PDT by DeaconBenjamin
JBC Energy sums up the thrust of Thursdays Opec meeting in one handy paragraph:
As expected, OPEC members decided to keep the current overall production ceiling of 30 million b/d unchanged during yesterdays meeting. Lowering the ceiling was not an option as the group is currently producing at around 1.6 million b/d above the target. On the other hand, an increase would not have been accepted by the price hawks. Saudi Arabia was allegedly asked by other members to cut production and adhere to the overall ceiling. Due to the lower prices and the massive global stockbuild, we forecast that Saudi Arabia will decrease production in H2 to 9.5 million b/d, bringing the 2012 annual average down to 9.7 million b/d.
What was interesting, of course, was Saudi Arabias unenthusiastic response to being asked to cut production for the purpose of ensuring the groups overall adherence to the Opec ceiling.
The request was understandable. Saudi Arabia has for years fulfilled the ultimate swing producer role in the cartel, behaving as the key enforcer of Opec policy in lieu of others members non-compliance.
But there appears to be growing reluctance.
Much of this could be down to the diminishing impact of Saudi cuts on the light-sweet oil price.
As Olivier Jakob from Petromatrix observed on Friday, the world crude oil price is currently being determined by the US a very significant change from the past few years. Thus it isnt so much Chinese demand that is setting the oil price or where crude flows, rather the impact of growing US supply.
This supply push, meanwhile, creates an ever more imposing footprint on the global oil price as and when the US invests more heavily in transport infrastructure which facilitates the export of such supplies from the Midwest.
As he notes:
The US cannot export its crude oil but it is exporting products which then has a negative impact for crude oil demand in Europe and it is reducing its crude oil imports of light /sweet crude oil which has a positive impact on crude oil supply in the Atlantic Basin.
With respect to Opec, the dynamics have the following effect:
The problem with the US supply push is that OPEC is ill-equipped to deal with it. Saudi Arabia is the global swing supplier but with no light/sweet crude capacity.
Hence when a country like Libya is losing its export due to war there is little that Saudi Arabia can do about it and when a country like the US is diverting light/sweet imports due to increased domestic production, Saudi Arabia cannot also do very much about it.
The demand currently is for replacement of Iranian barrels, for refinery production of bottom-ends (Japanese fuel demand) and not for refinery production of the top-end or for replacement of Nigerian barrels. The marginal demand is not for light/sweet crude oil hence we continue to believe that it will be harder in the second half for Brent to resist the US supply push and therefore that the time-structure of Brent can return to visible pressure.
In other words, there isnt much Saudi Arabia can do to support prices at least not while the US continues to be engulfed in its own (and Canadas) supply. Meanwhile, as the US need for light sweet (and other grades) subsides, more light sweet oil is left available to the global waterborne market, a trend that significantly eases the Brent market.
Thus, in a nutshell, you could say this is just another example of Opecs growing irrelevance. The game, ultimately, has changed.
As John Kemp noted this week, the point was beautifully echoed in comments from ConocoPhillips Chief Executive Ryan Lance to an audience including Opec oil ministers.
In 1990, North American reserves and production were falling but thanks to unconventionals, proved reserves have risen 68 percent since then, Lance told an audience of OPEC ministers on Wednesday. North America could become self sufficient in oil as well (as gas) by 2025, he said at a conference before OPECs policy-setting meeting in Vienna
As Kemp himself observes:
By boosting global output, the development of unconventional and deepwater resources in North America and the rest of the hemisphere could also cap, even partially reverse, the relentless upward trend in prices since 2002. Rising North American production may not make the region self-sufficient, but it could still transform the dynamics of the market. If I was an OPEC minister I would be concerned, according to Paul Stevens, a senior research fellow at the Chatham House Royal Institute of International Affairs in London.
These concerns were recently echoed by Barton Biggs of Traxis Partners, who cited a converation he had had with an elegant, artistocratic, well-connected Saudi investment manager where they discussed the outlook for Saudi Arabia over the next several years.
Under these dynamics it turns out there is little incentive for Saudi Arabia to remain an Opec team-player.
As Brazilian Bubble reported Biggs recounting of that conversation (H/T Sean Corrigan):
you have to understand our geo-political equation and vulnerability. Our two most dangerous enemies are Iraq and Iran. Both are Shia, and both are trying to destabilize the Arab world and our Sunni kingdom by funding terrorism. Our only weapons against them are our wealth and our oil. Their current vulnerability is their financial fragility. Their financial reserves are a fraction of ours, and they desperately need money to prop up their economies. The ruling council has decided that over the next two years we have a brief window of opportunity to impoverish and weaken them by driving down the price of oil.
Iraq and Iran need to produce and sell their oil at well over one hundred dollars a barrel. In the next twenty four months, we will gradually increase our production with the objective of breaking the price of crude down to sixty dollars a barrel.
Aramco is raising its capacity to produce significantly more crude. Note that at the same time Iraq, Russia, and Libya are already increasing their exports, and Iran and Venezuela also need to sell more. Strategic reserves in the consuming countries all over the world have been topped out, and large amounts of oil are stored in tankers.
we have the wind at our backs because of Europes problems and the weak global economy. Under normal recessionary circumstances, we would be reducing production to maintain current prices. Instead, we will be flooding a weak market already suffering indigestion.
OPEC and the others always cheat and produce beyond their quotas. They are self-indulgent adolescents who count on us to be the balance wheel.
Natural gas has never been so cheap in relation to crude. In ten years, with the age of austerity in America and Europe, hybrid and electric vehicles will be everywhere powered by electricity from natural gas. As for China, they will suffocate in their own pollution if they dont go electric.
Sometimes I wonder if we will be able as planned to stabilize the price of crude so smoothly at around sixty. Now there is an Iran-Hormuz risk premium in the quotation of perhaps twenty dollars. Maybe eventually there will be a psycho-speculative, electric-car discount. Perhaps, as the price erodes month after month and the U.S. becomes self-sufficient in energy, the commodity speculators will move to another game and selling will beget selling.
We could lose control, and the price could fall to forty or fifty dollars a barrel. Price wars always get worse than you think. Dont forget Brent futures traded between 40 and 60 for six months less than four years ago.
In short, perhaps not the best time to be playing the energy scarcity trade.
But .. but ... but .... we're being told we can't drill our way out of this problem, when clearly we can affect global prices!
You mean Obama lied to us all again?! I can't tell you how SHOCKED and DISAPPOINTED that Dear Leader would lie to us, his humble servants like that! (ROTFLMAO!)
(Sorry, couldn't continue that with a straight face...)
DRILL BABY DRILL!!!
DRILL GAIA LIKE A CHEAP WHORE!
If this was just aimed at Iraq and Iran, 80 dollars a barrel would do nicely. Instead, the sixty dollar target is the break even point for Bakken oil (Light Sweet Crude), the current unconventional play most damaging to the Saudis ability to control the market.
On the heavy crude end, the Canadian Tar Sands crude is a new and major player.
What the Saudis do not realize, though, is that the leases have been paid for: thousands of dollars an acre to lease 1280 acre spacings for the purpose of drilling for oil in ND, and those leases are perishable, for a finite period. They will expire unless held by production. Drilling will continue, at least enough to hold the leases, and Saudi efforts will cause some damage but not restore their position of market control.
It will, however slow progress toward domestic energy self-sufficiency for the US.
The Saudi’s need to walk a fine line with their oil output. They have the ability to bring down a number of enemies if played well.
So some how our oil drilling and export is up under 0bama? So there is truth to that?
I know there is an oil rush in the west right now, but it is enough to affect the Saudi regime and make 0bama look good?
I believe this article is more about Saudi Arabia then about what’s happening here in the US.
SA is in the catbird seat when it comes to setting the price of oil on the world market. Play it right and they can bring the present Iranian regime down or play it wrong and Iran will blow up the Middle East.
If I were Iran I’d forget about attacking Israel (there’s very little benefit in it) I’d attack Saudi Arabia, they are Iran’s biggest threat.
If exports are up, it is because people with no job to commute to/from aren't using much gas. And they are also not going on vacations.
ergo.....a glut of gas/oil for export.
For the first time in my life, I have met the "time" threshold (3 months) for an oil change instead of the mileage threshold(3000).
Only in bizarro world would someone convert a readily portable fuel into electricity to power a vehicle. Not to mention the efficiency losses of doing so.
Ten years hence, I would like to see OPEC no longer a factor whatsoever in setting energy prices. All sorts of global geopolitical problems would be solved if the Middle East were to go back to herding goats and organizing camel caravans, instead of dictating global strategy.
If we can get North American production up where it needs to be, that will happen.
You know when Zero says, “it George Bush's fault”, well this applies to our increase in oil production. That and the fact that almost all of our increases are coming from private land along with unconventional sources and improved technology.
Our imports are way down for two reasons the the economy and the increases mentioned above.
As far as the Saudi’s go I believe it's the other way around. The Saudi’s have the ability to control the market a lot more than we do. They have the ability to increase their output by 2 mbd if they want to.
More and more we're seeing OPEC becoming less relevant. North America along with Russia, Brazil and many other areas will continue this trend.
As much the US is improving its production Canada is going to grow even more. My surprise pick for future growth is ....Mexico, if a few things would happen down there.
They've had the potential for many, many years. But, IMO, the Mexican penchant for corruption is just to ingrained and will continue to retard progress.
And the $60 dollar BE of Bakken will decline, at least in constant dollars, as technology improves, a process which is continuous. I have read about new methods to increase the yield and efficiency of existing frack wells. That is what the free market does. To stay profitable you have to reduce costs and that occurs so long as artificial controls are not put in place by governments and monopolies are not created or enabled by governments.
Isn’t it amazing how free enterprise automatically finds where the most cost is and then develops solutions? The “Invisible Hand,” I think it is called.
North Dakota has passed California and Alaska to move into the number two spot for oil producing US States, behind only Texas. Oil production on private land is up, on Federal land, it has declined.
Obama gets no credit for this (despite trying to claim it); he has done all he can to impede progress, right down to blocking the most efficient means of moving crude oil to refineries from North Dakota and Canada (Keystone XL Pipeline).
Like instigating riots in Bahrain?
Like instigating riots in Bahrain?
No. I’d blow up SA refineries and infrastructure. Iran has only one source of income, oil and SA can move the price down to the point Iran would collapse.