The Fuse

CERAWeek: A Short List of Contradictions

by Leslie Hayward and Matt Piotrowski | March 14, 2017

At last week’s CERAWeek summit in Houston, a palpable sense of optimism had returned to the oil industry following last year’s somber mood when oil prices were languishing in the $30s. The giddy feeling didn’t last: By the end of the week, oil prices had given back about 9 percent, wiping out gains made since the OPEC meeting and re-igniting fears of another price crash.

Oil producers aren’t out of the woods yet with the future clouded by contradictions, ironies, and unknown unknowns that the industry, OPEC, and analysts will continue to wrestle with moving forward.

Reading between the lines, producers aren’t out of the woods yet with the future clouded by contradictions, ironies, and unknown unknowns that the industry, OPEC, and analysts will continue to wrestle with moving forward. Here’s our list of plot twists:

Short-term glut versus long-run investment risks

Although the world is still in the midst of a seemingly perpetual glut, a supply gap looms. That was the view of a number of speakers, most notably IEA’s Fatih Birol who warned of $80 by early next decade and spare capacity falling to 2008 levels, based on the lack of investments in larger, more capital-intensive projects. “Invest, invest, invest!” Birol urged the industry.

No peak demand versus disruptive transportation innovations

“I find that neither climate change policies nor technology shifts have quenched their insatiable thirst for oil,” Saudi Energy Minister Khalid Al-Falih told the audience. “Indeed, demand for petroleum imports will continue to grow steadily in the developing world.”

If demand were to plateau in the not-so-distant future, why bother pouring billions into upstream investments?

OPEC oil ministers, the IEA, and industry CEOs all argued that oil demand won’t peak for decades, but tech experts at two side panels said that a coming transportation revolution—with a mix of autonomy, ridesharing, and electrification decimating demand—is a matter of when, not if. What outlook should the industry and governments of consuming countries embrace? If demand were to plateau in the not-so-distant future, why bother pouring billions into upstream investments? But if demand continues at a healthy clip for decades to come, what does that mean for oil prices once the lack of outlays starts to bite?

OPEC threatened by shale, yet praises it

First shale undermined OPEC, then OPEC glutted the market to batter shale, and now shale is neutralizing OPEC’s production cut. Despite this push and pull between both sides, OPEC speakers praised shale last week for playing a stabilizing role. OPEC Secretary General Mohammad Barkindo, along with OPEC oil ministers, even met with shale producers in Houston.

OPEC speakers praised shale last week for playing a stabilizing role.

Exemplifying the dysfunctional relationship, Continental CEO Harold Hamm noted that oil producers in both OPEC and the shale patch are “all in the same boat,” and called for his fellow shale producers to moderate their rebound. Is shale competing with OPEC, or trying to join it? The CEO of Hess Corporation said that that the two sides can “co-exist” and was one of the various CEOs who met with OPEC representatives last week. Barkindo said the meetings were to learn about the shale industry and to exchange information about the oil market, prompting questions about how cozy the two sides will be moving forward.

OPEC’s love-hate relationship with hedge funds

OPEC has been meeting with hedge funds and other investors for a few months now, a turnaround from the past when the cartel demonized speculators, pointing fingers at hedge funds as the real culprits to deflect blame for higher prices. Now, however, the cartel wants to fully understand their operations to more effectively manipulate sentiment to make the futures market work for them. But OPEC may reap what it sows. Here’s the rub: While speculators can help OPEC’s interests—as they have done in the past year by bidding up prices—they can also crush the market if fundamentals remain sloppy or OPEC doesn’t extend its cuts.

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