Posted on 12/04/2015 4:26:11 AM PST by thackney
Oil strategists from a handful of countries are gathering in Vienna this week to decide whether or not to create an artificial scarcity of crude to boost oil prices.
Outsiders don't expect the Organization of Petroleum Exporting Countries to make big changes to its current strategy, but any hints that it is laying groundwork for new plans could move energy markets - dramatically. After an OPEC meeting this time last year, U.S. crude fell more than $7 a barrel when the cartel decided against squeezing supplies despite of a global oil glut, choosing to defend its corner of ever-evolving markets in East Asia and North America.
OPEC's meeting officially begins on Friday. Here's what has changed about the group and the world around it lately.
Market Influence
The 12 OPEC nations put out just 4.4 percent of the world's gross domestic product last year and together make up a quarter of the planet's land mass. But they control 73 percent of the world's oil reserves and for years have worked together to sway oil markets by tweaking output levels, a strategy that gives them out-sized influence in a global economy that runs mostly on oil.
But the oil exporters chose not to tap into their market power last year, and if they do the same this year by keeping their oil flowing at the same rate, some believe it would just be confirmation the international cartel has become less relevant on the global energy stage. "It's more and more looking like an organization that is very moot at this point," said Jamie Webster, a senior director at IHS Energy.
Barclays analysts wrote Thursday there are too many bearish market forces at play for OPEC to be able to prop up prices with bullish intonations alone. The market, Barclays said, is still expecting Chinese economic growth to lag next year; Iranian production to increase; a drop in winter demand and, if the Federal Reserve starts hiking interest rates, the effect on the dollar could make it more expensive for international buyers to buy dollar-denominated crude, sending demand and prices down.
Shale
The implication is OPEC has ceded market-pricing influence to other market players including the financiers who back U.S. shale production, a flexible source of crude supplies that can shift output up and down relatively quickly depending on prices.
Because shale wells have rapid depletion rates, oil producers have to keep drilling at high rates to keep output growing. But it's an expensive venture, so equity and debt capital markets are key to shale drilling and have become a more central player in determining oil supplies. Shale production kept increasing earlier in the year when capital markets were pouring cash into distressed oil companies, but the output has fallen as investors have reined in cash, realizing oil prices aren't making a quick recovery.
Indonesia and Iran
Indonesia, which joined OPEC in 1962 and left the group in 2009, is returning into the fold at this year's meeting, meaning the cartel could announce an increase in its overall crude production target of roughly 1 million barrels a day to accommodate the oil importer. But the change won't actually affect behaviour at OPEC; that is, it likely won't cause the group to pump more oil. The group's production target has historically been a faint guideline, surpassed easily and often. The cartel is currently pumping around 2 million barrels over its target currently.
One nation OPEC isn't likely to make accommodations for is Iran. Iranian officials have called for its fellow exporters to curb production in order to make room for the Islamic Republic's return to the oil market next year, but Saudi Arabia and other key Gulf states are expected to ignore pleas for production cuts. The United States and other western powers are expected to lift oil sanctions against Iran in exchange for constraints on Iran's nuclear program. Iran expects to boost its production by at least 500,000 barrels a day next year.
Proven Strategy, So Far
Crude production outside the organization is slated to fall in the current quarter for the first time in four years, with declines reaching 520,000 barrels a day early next year, according to the U.S. Energy Information Administration. OPEC's top oil exporter Saudi Arabia, the world's largest crude producer, has said it will not cut its production alone to buoy the market.
Saudi Arabia has the financial resources to ride out the oil slump for at least half a decade, according to the International Monetary Fund, and can afford to wait a while longer for the downturn to fix the market oversupply. But oil production around the world will have to fall a lot further before supply and demand are rebalanced..
"The strategic reasons of why (OPEC) made the policy stance they did last year are still there and still in place this year, even though the pain has been greater than any OPEC member expected over the course of the past year," Webster said.
Outside Cooperation
Some traders are hoping Saudi Arabia has found another oil exporter willing to help curb production: Russia. The world's two biggest oil producers have been building closer ties in the energy sector, with Saudi Arabia investing $10 billion in Russian infrastructure and energy projects. The two recently formed a working group to start talks on cooperation in oil and gas, and market observers are watching for any signals from the OPEC meeting that the two geopolitical rivals may pair up.
But there are plenty of reasons such an alliance is doubtful. Saudi Arabia and Russia are supporting different sides in the Syrian civil war. Russia backs the regime of Syrian President Bashar al-Assad, while Saudi Arabia supports the rebels trying to overthrow him. Also, Saudi Arabia and Russia have become fiercer rivals in the past year, with Russia sending more exports to China through a well-placed pipeline and Saudi Arabia encroaching on Russia's turf in Poland and other European markets.
Do they take the oil from ISIS being transported to Turkey into consideration? (why our military is not going after ISIS per administration ROE against his boots on the ground. Repeat “his” not “our”)
Keep the oil glut in order to drive out US, Canadian production. Then lower the boom on us ?
Why would that be an OPEC consideration for production cuts?
Saudi Arabia throws down challenge on oil production cuts
http://www.cnbc.com/2015/12/03/financial-times-saudi-arabia-throws-down-challenge-on-oil-production-cuts.html
3 Dec 2015
Saudi Arabia has thrown down a challenge to big rival oil producers ahead of this week’s Opec meeting, saying it would back output cuts as long as they were supported by countries both inside and outside the cartel.
The kingdom, the Organisation of Petroleum Exporting Countries’ (OPEC’s) de facto leader, has set a high bar for a deal that is unlikely to be met by the time of Friday’s meeting in Vienna, but it leaves open the possibility of an agreement in 2016.
The move indicates a further softening in tone from the world’s largest oil exporter which led the cartel’s landmark shift in policy a year ago, arguing that keeping the taps open would pressure high-cost rival producers. Opec’s strategy shift upended the oil industry and triggered the biggest price slump in at least a decade.
A senior Opec delegate said there was no question of Saudi Arabia lowering its production without backing from Iraq and before Iran’s full return to international markets. Cooperation from producers outside of the cartel, such as Russia, would also be needed. Moscow has repeatedly rejected calls to join output cuts and has raised production to record levels.
“In order for there to be a cut in production non-Opec must participate, Iraq has to participate and the Iran output picture has to be clear,” the delegate said.
Energy Intelligence, a specialist industry publication, said Saudi Arabia would back a co-ordinated cut of 1m barrels per day next year - the equivalent of just over 1 per cent of global oil supply - if Opec members Iran and Iraq agreed to limit production alongside Russia, the biggest exporter outside the producer group.
(excerpted)
Trying to control world prices?
I heard a news report that the reason why the regime has not gone after the ISIS oil pipelines was that it would result in a climate (environmental) disaster.
Isn’t that the sole reason OPEC has existed for decades?
I don’t think ISIS is using pipelines.
I heard reports of not attacking wells for environmental reasons.
FACT IS T H E Y C A N T reduce production
because their social programs woudl collapse and the governments with it ......
THAT’S HOW SOCIALISM WORKS
THAT HOW ROME COLLAPSED
they an delay but not prevent the inevitable...which is regime change throughout opec..... and radical islam is the only power to fill the void.... then oil prices will be raised... REAL HIGH
You are right.
Uh, no. If they produce less, the price goes up. They could make more money, or the same amount by doing less.
Saudis decided they wanted to maintain "market share," not price. It's a move to exchange less revenue for the prospect of pricing US shale oil out of the market.
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