by Ambrose Evans-Pritchard
December 14, 2015
The OPEC cartel is to continue flooding the world with crude oil despite a chronic glut and the desperate plight of its own members, demanding that Russia, Kazakhstan and other producers join forces before there can be output cuts.
Brent prices have tumbled $3 a barrel to below $41, US crude over $4 to below $38, as traders tried to make sense of the fractious OPEC gathering in Vienna last Friday (12/04), which ended with no production target and no guidance on policy. It reeked of paralysis.
Prices are poised to test lows last seen at the depths of the financial crisis in early 2009. The shares of oil companies plummeted in London, and US shale drillers went into freefall on Wall Street.
“Lots of people said OPEC was dead. OPEC itself has just confirmed it,” said Jamie Webster, head of HIS Energy.
Venezuela’s oil minister, Eulogio del Pino, pushed for a cut in output of 1.5m barrels a day (b/d) to clear the market, describing the failure to act as calamitous. “We are really worried,” he said.
Abdallah Salem el-Badri, OPEC’s chief, conceded that the cartel’s strategy has been reduced to an impotent waiting game, hoping that the pain of low prices will lure Russia and other global producers to the table. “We are looking for negotiations with non-OPEC, and trying to reach a collective effort,” he said.
Mr. el-Badri said there have been “positive” noises from some but none is yet ready to lock arms and create a sort of Super-OPEC, able to dictate prices. “Everybody is trying to digest how they can do it,” he said
The cartel’s 12 members postponed a decision on their next step until next year, once they know how much oil Iran will sell after sanctions are lifted. “The picture is not really clear at this time, and we are going to look one more time in June,” he said.
“Everybody is worried about prices. Nobody is happy,” said Iraq’s envoy, Adel Abdul Mahdi. His country has lost 42% of its fiscal revenues and is effectively bankrupt.
Foreign companies are owed billions and have begun to freeze projects. The Baghdad government cannot afford to pay its own security forces and is cutting vital funding for anti-ISIS militias, raising fears that the political crisis could spin out of control.
Helima Croft, from RBC Capital Markets, said four of the frontline states in the fight against ISIS are now being destabilized by the crash in oil prices, including Algeria and Libya.
OPEC leaders will now have to grit their teeth and prepare for a long siege, testing their social welfare models to the point of destruction. Even Saudi Arabia is pushing through drastic austerity measures.
Deutsche Bank said the fiscal break-even cost needed to balance the budget is roughly $120 for Bahrain, $100 for Saudi Arabia, $90 for Nigeria and Venezuela, and $80 for Russia, based on current exchange rate effects.
“It is going to be 12 to 18 months before they see any relief,” David Fyfe, from the oil trading group Gunvor, said. “We think oil stocks will continue to build in the first half of next year and we don’t think they will draw down to normal levels until well into 2017.”
Mr. Fyfe said Iran has 40m to 50m barrels floating on tankers offshore that will flood onto the market as soon as sanctions are lifted. It will then crank up extra output to 500,000 b/d by the end of next year.
Per Magnus Nysveen, from Rystad Energy, said it will take a very long time to force the capitulation of America’s shale industry. While the rig count in the US has collapsed by 60% over the past year, the number of wells being “fracked” has risen in recent weeks.
“There is still an inventory of 3,500 wells. Theoretically they could continue fracking at this pace for another six months without any new drilling. We don’t think there is going to be a significant fall in US output next year. It could be flat,” he said.
Mr. Nysveen said the damage will be in other parts of the world, chiefly the mature offshore fields in the Gulf of Mexico, North Sea, Brazil and Africa. The decline rate of old fields will double to 10% a year, subtracting 750,000 b/d from world supply within 12 months.
It is going to be a long war of attrition. The world is awash with oil. US crude inventories rose further last week by 1.6m barrels to the vertiginous level of 489.4m.
China has been soaking up some 250,000 b/d for its strategic reserves, preventing a collapse of the market. But the old sites are filling up and it is unclear whether new facilities are ready.
OPEC is now just as irrelevant as the once mighty Texas Railroad Commission
More than 100m barrels are being stored on tankers offshore. Tanker day-rates have soared to more than $111,000 – the highest since July 2008 – as the last remaining vessels are booked to absorb the glut.
Goldman Sachs warns that the market is approaching an “inflexion point” that could send prices crashing to a new a floor of $20, the “cash cost” that forces drillers to stop production altogether.
A dangerous situation is developing. OPEC policy has caused spare capacity to fall to a wafer-thin margin of 2m b/d, leaving no one to act as the regulator of the market.
This sets the stage for a violent spike in prices down the road. The International Energy Agency says the world needs $650bn of fresh investment each year in upstream oil and gas just to stand still, yet $240bn has already been slashed from projects earmarked for next year.
Bhushan Bahree, from HIS Energy, says there is no longer anything to distinguish OPEC members from any other producer. The cartel is defunct. “OPEC and non-OPEC are irrelevant classifications,” he said.
There is a new world order of three oil superpowers with roughly equal shares – Saudi Arabia, Russia and the US – and none of them is yet willing to cut output voluntarily to shore up prices.
The Americans would never agree to such a move. The Russians cannot easily do so, given that their key producers are listed-companies, supposedly answerable to shareholders, and Siberian conditions make it hard to switch output on and off. The Saudis are stuck.
Mr. Bahree compares the demise of OPEC with the fall of the Texas Railroad Commission, the once mighty giant that set output and controlled world prices through the middle years of the 20th century. The Commission still exists, a forgotten shadow of its former self. Today it issues local permits.