The Fuse

Groundhog Year for OPEC

by Matt Piotrowski | July 10, 2017

Despite OPEC’s commitment to production cuts, it finds itself with ongoing headaches of dealing with a resilient U.S. shale patch and internal dilemmas with Nigeria and Libya recovering at a relatively swift pace.

The bearish news in the oil market just won’t stop. Prices are down 17 percent this year; the U.S. rig count jumped last week; Nigeria and Libya are pumping higher volumes than expected; the number of investors betting on lower prices remains at high levels; and U.S. crude inventories are still higher than year-ago levels even with last week’s big draw. Despite OPEC’s commitment to production cuts, it finds itself with ongoing headaches of dealing with a resilient U.S. shale patch and internal dilemmas as Nigeria and Libya are recovering at a relatively swift pace, adding 600,000 b/d since October.

It’s groundhog year for the cartel, which has been unable to structurally shift fundamentals and prices in its favor since the price collapse in mid-2014, and it is reliving its catch-22 scenario with competing producers. OPEC’s members have yet to fight off shale players, which have boosted efficiency gains during the price downturn and managed their balance sheets well by hedging forward. And in OPEC itself, Nigeria and Libya, producers not bound by output caps, are partially offsetting cuts made by the rest of the group. In a sign of how much disruption Libya and Nigeria have caused, there has been talk that OPEC will impose production ceilings on the two—but it’s unclear whether both would go along with output ceilings given their need for increased revenue to recover from protracted outages and domestics conflicts.

Short-term bear, long-term bull?

Headline after headline in the oil market is bearish, and for good reason. But as always, there’s little room to be complacent. Saudi Aramco’s CEO Amin Nasser warned on Monday that the oil market will see a supply shortfall in coming years as $1 trillion in investment has been lost from the price downturn and the world will need 20 million b/d of new production in the next five years to keep a deficit from emerging. The comment was self-serving, of course, since the Kingdom wants a tighter market and higher prices. But he’s echoing warnings from others—including the International Energy Agency and Wood Mackenzie—that suggest today’s underinvestment will create greater risks in the coming years.

The Aramco CEO is echoing warnings from others—including the International Energy Agency and Wood Mackenzie—that suggest today’s underinvestment will create greater risks in the coming years.

Nasser’s cautionary remarks come at the same time consultancy Rystad notes that older fields are declining at an accelerated rate. This year, they could fall by 6 percent, double the rate in 2014. “A lot of the focus is on OPEC and shale and not on the decline at these mature fields, where supply is struggling,” said Espen Erlingsen, a partner at Oslo-based Rystad, according to Bloomberg. “We’re starting to see the long-term impact of lower oil prices.” He added that the higher decline rates “is making OPEC’s life a little easier.”

rystadbloomberg

There’s another bullish factor that has not received all that much attention. Last week’s EIA data showed the strongest total U.S. oil demand figure ever at 22.26 million b/d. While that number is preliminary and subject to revision, it could also be a harbinger that elevated consumption is here to stay with pump prices remaining low and the economy performing well.

U.S. producers appear to be winning in the high-stakes battle between the two. For now at least.

Shale has put great pressure on OPEC over the past several years and vice versa. U.S. producers appear to be winning in the high-stakes battle between the two. For now at least. OPEC’s commitment to reducing the global overhang of inventories and its low-cost production suggest the environment could eventually turn in its favor. The oil market, and OPEC’s fortunes, may be going through a groundhog day scenario right now, unable to breakout to the upside despite last year’s sharp decline in shale and this year’s OPEC production cut. But the outlook still looks turbulent.

 

 

 

 

ADD A COMMENT