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Precise Consultants

Precise Consultants

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Should OPEC Abandon Its Current Oil Price Strategy?

Oil Rig

If OPEC was a person, you’d recommend either therapy or that it cut its losses and start licking its wounds.

As Bill Baruch, chief market strategist at iiTRADER told marketwatch.com, “OPEC threw the kitchen sink at the market, trying different statements that ranged from extending cuts past the end of 2017 and deepening cuts – nothing worked.”

Prices have continued to slide, dropping to the lowest yet in 2017. Brent crude dropped beneath $50 pb during the week, to $48.79. WTI sank further, to $45.90.

It’s largely due to the increase of over 10 percent in U.S. output since 2016Q3; stocks are at 527.8m barrels which is at the higher end of expectations for this time of year.

However, shale isn’t the sole source of pain – Libya has also achieved its highest level of production since 2014 at almost 800,000 pbd, thanks to two fields – the El Feel and Shahara. It’s a far cry from the 1.6m bpd it was pumping before the 2011 uprising but it cuts into the impact the overall OPEC agreement could have. Related: Solar Power To Threaten Conventional Power By 2020

Everything gained since the production curing deal was struck has now vanished. And it’s far from clear what can be done to bring it back. Concern over a reduction in demand, the rising U.S. dollar and increasing U.S. crude output is casting doubt in OPEC’s ability to have any positive market impact. Despite Saudi Arabia’s dramatic commitment, suggesting that it “would do whatever it takes” to rebalance the market, prices have continued to slip.

Norbert Ruecker, head of macro and commodity research at Julius Baer, was unable to see any silver lining when he told Reuters.com: "U.S. oil production surpassed expectations in terms of an early bottoming and swift uptick, and is set to expand further based on the latest drilling momentum. We see prices between $45-50 per barrel as fundamentally justified.”

As if raising U.S. oil production forecasts for 2017 weren’t enough, the Energy Information Agency has predicted the same for 2018, as well. It’s also readjusted its price estimates for prices in 2017 to $52.60 per barrel for Brent and $50.68 for WTI.

Related: Russian Producers Fall Behind As Big Oil Booms

Leaving no room for confusion, EIA Acting Administrator Howard Gruenspecht said: "Higher oil production from the United States, along with rising oil output from Canada and Brazil, is expected to curb upward pressure on global oil prices through the end of 2018.”

There’s an important lesson from the Commerzbank analyst Eugen Weinberg. He told Reuters: “At some point, the market should recognise OPEC isn’t the most important player in the market any more. That is non-OPEC and above all, U.S. shale.”

The question we need an answer to is how far does the penny have to drop before someone notices it?

By Precise Consultants for Oilprice.com

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  • RD on May 11 2017 said:
    Quite the quandary...since most of the shale players hedges kick in around the current price..lowering the price would not have the impact needed. Cutting on the other hand could drive prices and service cost up that could possibly adversely effect hedged players if you get above their call. Don't believe all this stuff about locking in cost..that is unicorn stuff..when demand surges the services goes where the money is the greatest. Could that effect demand..yes. Thus may be a nonstarter. The smart move may be to keep prices range bound 45-55$bbl. The shale activity will continue as PE companies that bought $50,000 acre leases have no option but drilling them regardless of price. Much of the recent gains have been due to hammering sweet spots..that will continue and more sweet spots will appear..also some acreage will be destined for the boneyard. Shale will grow until its reaches a level where it will begins to top as it will back fill high decline wells while holding modestly growing or flat production. That may be another 2-4 mmbopd who knows, but it will happen. Look at last quarter earnings among the players..that was at 55$ oil and most are still not funding themselves..it will improve but this resembles the chalk development profile. Drill like hell to get production up and keep drilling like hell to maintain it or slowly grow it..or slowdown and watch it fall like a rock. Also; the current low lifting cost is due to new flush production; however as wells become older (artificial lift with lower rates) the $/bbl lifting will be on a steady march up. So what does opec do..I have no idea...even though I slept at a holiday inn express last night

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