Unless you have been living under a rock, by now you have read that OPEC has decided to leave its production target unchanged. A widely expected move, OPEC’s decision to leave its collective output at 30 million barrels per day will likely not have an enormous effect on the oil markets in the short-term. Prices were down a bit on June 5, but the markets had largely baked OPEC’s move into the price already. In fact, there were rumors that the group may even lift its production target, but that was not generally seen as likely. If that had occurred, prices would have been crushed. But with the status quo affirmed for now, OPEC appears comfortable with its strategy to play for market share, and the markets will have to continue on their path towards slowly balancing out.
Heading into the meeting, OPEC officials cited the early success of its market share strategy. Having forced US shale production to level off and rig counts to drop by more than half, Saudi Arabia and its OPEC companions are maintaining their share. They expect that to continue. Also, prices have rebounded from their lows, jumping from the mid-$40s per barrel for Brent to above $60, and that didn’t come on the backs of OPEC. In other words, OPEC sees the markets balancing out in the months ahead – a trend already underway – which will lead to price increases, and all the while the group will have held onto its market share. Related: Expect The Recent Oil Rally To End Badly If OPEC Doesn’t Cut
The strategy will be the legacy of the most important oil man in the world – the Saudi Oil Minister Ali al-Naimi, who may have just wrapped up his last OPEC meeting. The 79 year-old is expected to retire, but is widely hailed throughout the oil world as a masterful leader of OPEC. Growing up in Saudi Arabia’s eastern provinces, he was plucked out of a shepherd’s field at age 12 to work small tasks for Aramco. He rose to the top, becoming President of Saudi Aramco and eventually oil minister.
He controlled the helm through turbulent times – the global financial crisis, the Arab Spring and, most daunting of all, the onset of the US shale revolution. Abandoning the traditional response of lowering output, al-Naimi forced through his decision to keep output steady in the face of a growing global glut of oil while resisting opposition within OPEC. The move will probably be the most memorable period of his legacy, and he will go out with respect from oil executives around the world.
With that said, there is hardly harmony within OPEC over al-Naimi’s chosen pathway. One interesting development during the OPEC meeting in Vienna was the difficulty Iran had at getting its voice heard. Iranian officials insisted that OPEC make room for its expected increase in oil output, assuming that western sanctions are lifted following an historic agreement with the West over Iran’s nuclear program. Iran may be able to rapidly ratchet up its oil output, with expected increases ranging from 400,000 barrels per day within a few months, to as much as 1 million barrels per day by next year. That would require some change in policy on behalf of OPEC. If a deal with the West is secured and sanctions are lifted, the November 2015 OPEC meeting will be much more interesting than the one that just concluded. Related: This Nation Is Poised For A Massive Refining Boom
And interest in Iran is huge. French oil giant Total (NYSE: TOT), along with a litany of other European oil firms, have expressed strong interest in going back into Iran. “We love Iran,” Total’s CEO Patrick Pouyanne, said after a private meeting with Iranian officials on the sidelines of the OPEC meeting. But, as a result of the sanctions, he lamented “[w]e can’t invest in Iran.” With the nuclear negotiations now just a few weeks away, a lot could change in a short period of time.
The other piece of news coming out of the OPEC meeting was Indonesia’s push to rejoin the cartel after six years away. Indonesia used to be a full member of the group, but suspended its membership when it became a net oil importer in 2008. The gap between Indonesia’s production and consumption has only grown since then, but Indonesia sees more benefits of being inside than outside OPEC. In fact, Indonesia is keen to secure supply contracts with OPEC members, as it is planning on a major build up in refining capacity and needs crude supplies to fuel the production of refined products. Generally speaking, being a net oil exporter is a prerequisite of becoming a full member of OPEC, but Indonesia is pushing to regain full member status, perhaps as early as the November meeting.
Enough about OPEC. Back in the US the Environmental Protection Agency released a highly anticipated study over the effects of hydraulic fracturing on groundwater contamination. The agency found no indication of “widespread, systemic” pollution from fracking. Still, the report did find individual cases of contamination, but the headline was that fracking is not inherently risky. The oil and gas industry welcomed the report as evidence that fracking can be done safely. Fracking opponents, on the other hand, were dismayed, but argued the report was hardly conclusive. The report should give ammo to industry supporters in places that have become battlegrounds over the controversial drilling practice, such as Texas, California, Pennsylvania, and Ohio. Related: This Dutch Innovation May Solve The Energy Storage Problem
The Financial Times reported on a new technology coming out of Estonia that could open up a truly massive amount of energy. Estonia is a pioneer in “oil shale” technology. That is not to be confused with shale oil – oil that we have become familiar with that is drilled in the Eagle Ford and the Bakken. Oil shale on the other hand is a precursor to oil, a solid rocky substance called “kerogen” that can be mined and heated up to eventually release useful amounts of oil and gas. It is much more expensive and dirty than conventional or even unconventional oil from fracking. But Estonia has improved the production efficiency of the process and may begin exporting its technology. The mind-boggling fact to remember about kerogen, or oil shale, is that there are an estimated 5,000 billion barrels of it around the world, a higher level of reserves than conventional oil. Up until now most of that has been off limits, but Estonia is on the verge of cracking that open. It plans on exporting its technology for the first time to Jordan.
By Evan Kelly Of Oilprice.com
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