The Fuse

OPEC Touts Its Oil Market Manipulation

by Matt Piotrowski | October 10, 2017

OPEC is not holding back in touting its efforts to manipulate oil supply levels to increase prices. The cartel’s secretary-general said that OPEC may take even more action in order to tighten oil market fundamentals. “To sustain this [market rebalancing] into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward,” Secretary-General Mohammad Barkindo stated over the weekend.

 “To sustain this [market rebalancing] into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward.”

Barkindo’s remark comes on the heels of Saudi Arabia’s meeting with Russia last week. Riyadh and Moscow tightened their energy ties and emphasized their willingness to continue cooperation to manipulate the market. OPEC has made it known that it wants to “institutionalize” the collaboration between OPEC and non-OPEC oil producing states, reinforcing the importance of the Saudi Arabia-Russia alliance. The countries represented in the current OPEC/non-OPEC agreement add up to approximately 55 percent of daily global oil supply.

Saudi Arabia further highlighted its commitment to cutting output. The country’s energy ministry said on Monday that state-run Saudi Aramco will cut allocations to customers for November by an “unprecedented” 560,000 barrels per day (b/d). “Saudi Arabia is once again demonstrating extraordinary leadership in its commitment to re-balancing the market,” the ministry said. “The kingdom expects all other participants in the effort to follow suit and to maintain the high levels of overall conformity achieved in August going forward.” Saudi Arabia’s statement reflects its determination to see higher prices and its willingness to lead by example.

The cartel’s next meeting is set for November 30. OPEC members have consistently stated as of late that oil market fundamentals and prices are moving in their favor, but they still have challenges ahead, not least of all the growth of U.S. shale. A surge of non-OPEC supply, particularly U.S. shale, is slated to come online in 2018, prompting worries that the market will return to oversupply. This outlook will likely motivate OPEC producers, when they meet next month, to continue the agreement throughout all of 2018, or expand the cut by taking more volumes off the market.

U.S. shale has been a thorn in OPEC’s side, and is forecast to grow by roughly 600,000 b/d, or 6.5 percent, in 2018. The rebound in U.S. production this year has kept the oil market in check—global benchmark ICE Brent is hovering in the mid-$50s. The U.S. exported a record two million barrels per day of crude during the last week of September, sending crude volumes to a variety of different markets and mitigating the effects of the OPEC cut.

Even though shale is forecast to grow through the end of 2018, expectations have been tempered.

Yet it’s unclear for how long shale can effectively offset OPEC’s actions. Even though shale is forecast to grow through the end of 2018, expectations have been tempered. Wall Street analysts point out that shale producers are becoming more disciplined with output growth. “Investors are no longer rewarding ‘growth at any cost’,” said Morgan Stanley analysts last week. OPEC has taken notice of shale underperforming expectations. Barkindo, in a speech on Monday, argued this development is good news for the cartel. “We have recently seen a deceleration in U.S. tight oil growth compared to the first half of the year, evidenced recently by the falling productivity of wells, particularly in the Permian, as well as growing concerns from the investment community.”

All eyes will be on OPEC’s words and actions ahead of next month’s meeting. The continuation of the cartel’s supply agreement is not a foregone conclusion, but given the group members’ commitment to the cuts so far and recent upbeat comments from the Saudis and others, expect more OPEC collusion throughout 2018.

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