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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Oil Guru Sees OPEC Dissolve If Deal Fails

Tank Farm

The nearer the OPEC November 30 deadline draws, the more critical its decision gets. In fact, it may well be a case of life or death for the once-reigning oil cartel.

The expert who predicted the 2014 price downturn, Gary Ross, told Bloomberg recently that if OPEC wants to regain its relevance for global oil markets, it needs to get all its members to join the party. Failure, on the other hand, would likely ring in the end of the OPEC era and a major reshuffle in oil markets as the members of the seemingly divided cartel strike out on their own.

Gary Ross is executive chairman of PIRA Energy Group, which is now a unit of S&P Global Platts. Known for his accurate predictions, Ross is a very popular energy industry analyst. Earlier this year he reinforced this opinion by accurately predicting that prices will bottom out and move up from the February trough of sub-US$30 a barrel.

But you don’t have to be a Gary Ross to see that things are not looking up for OPEC. At the start of this week, oil prices did rise a bit, reflecting the return of some optimism regarding the production cut agreement, but the success of this agreement continues to be highly questionable. The markets are capitalizing in the fluctuations, and is reflexive of that, rather than an overarching faith in OPEC.

Let’s recall what the foundations for the agreement are: as one OPEC source told Bloomberg, Saudi Arabia insists on four conditions. These include that all members of the organization agree to the measure; that they share the cut “equitably”; that they implement the market rebalancing measure in a transparent way; and that they do it in a way that helps OPEC regain its credibility.

Now, the source added that the latter could be ensured by using secondary-source production figures for each member, but that’s a point of contention between Saudi Arabia and Iraq. If the Saudis agree that Iraq could use internal figures, credibility would suffer.

Also, there is the issue of exemptions, which nullifies the “equitability” factor. So far, two OPEC members have been granted exemption from any production freezes or cuts on the grounds of lost market share. Nigeria and Libya are wasting no time to regain this market share by building production.

Related: Iran Nears Pre-Sanction Levels, Starts Pumping Oil At 3 New Fields

Libya is pumping 660,000 bpd and is planning to restart exports from the biggest oil port in the Oil Crescent, Es Sider.

Nigeria is producing around 2 million barrels daily right now, despite renewed militant activity in the Niger Delta, and has bold plans to raise this to 2.8 million tons by 2019.

Outside OPEC, Russia is pumping at record-high rates, Brazil has stated it will not be joining any production cuts, and basically nobody wants to joint OPEC’s effort, no matter what they say at official events.

It looks like OPEC is well on its way to losing its international relevance. According to Ross, however, the group will reach an agreement, “when push comes to shove”. Iraq and Iran might relent and accept secondary-source production figures, after all. Russia might decide to put its production where its mouth is and join a freeze.

However, at these production rates, the effect of the freeze/cut is likely to be insubstantial, bar a temporary uptick in prices on the “good news” alone. The global glut is still very much real, and let’s not forget that the freeze/cut is being negotiated to last for 12 months. All OPEC members may not be able to cope with a production curb of this duration.

By Irina Slav for Oilprice.com

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  • Bill Simpson on November 23 2016 said:
    The reason OPEC was formed was to get the price of oil off the floor, so that the oil exporting countries could make some money from the most useful energy source ever found. Since nearly all OPEC members are now producing all the oil they can, without the oil price cratering, it won't be too many years before the demand for oil will exceed what can be produced. Once that happens, the oil price will rise until demand is reduced by the high price. And it will be a VERY high price, because there is nothing that can replace diesel, kerosene, fuel oil, and gasoline at an affordable price. So fairly soon, OPEC will no longer be needed to restrict the supply of oil on the market in order to drive up the price. Peak oil will begin to do it. I give it about 10 years. Without recent technological advances in horizontal drilling and fracking, we would be in a world of hurt by 2022. But with them, the date of the peak will be closer to 2027. So you don't need to get the electric car just yet. Wait until the batteries get better and cheaper as billions of them are produced.

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