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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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OPEC To Take Drastic Action Despite Shale Slowdown

Oil

WTI recently dipped below $50 per barrel for the first time in a month, erasing the strong September rally. It’s no coincidence that after two weeks of price declines, OPEC has tried to talk up the oil market again, hinting that more drastic action could be forthcoming.

Echoing the world’s top central bankers, OPEC’s Secretary General said that the oil cartel might need to take “extraordinary” measures to balance the oil market next year. “There is a growing consensus that, number one, the re-balancing process is underway,” OPEC’s Mohammad Barkindo told reporters on Sunday in New Delhi. “Number two, to sustain this into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward.”

As always, OPEC is vague on the specifics, but the working assumption is that the group will agree to an extension of the cuts until at least mid-2018, or perhaps even as late as through the end of the year. There’s been some discussion about deeper production cuts, but there aren’t a ton of analysts who see OPEC going that far, despite Barkindo’s cryptic language.

Meanwhile, Saudi Arabia engaged in a bit of its own psy-ops with the oil market on Monday, saying that it was taking “unprecedented” steps to cut its oil exports. Saudi Aramco said it would lower exports by 560,000 bpd next month, “the deepest customer allocation cuts in its history.”

The comments are consistent with the country’s longstanding pattern of trying to jawbone the market when it wants higher prices. Based on Monday’s activity, the effort didn’t work. “The fact that we did not get any significant strength from the Saudi news is rather disheartening for the bulls,” Stephen Schork, an analyst and author of the Schork Report, told the WSJ. “The market is very skeptical of this.” Related: This Key Data Points At Strong U.S. Oil Demand

Of course, real cuts to oil exports will be felt if they are carried out, but after a few years of getting jerked around by every utterance from OPEC, the markets want to see proof in the pudding. Aggressive rhetoric no longer moves the market the way it did a year ago, so we’ll have to just wait and see what OPEC does at its November meeting.

“With rising production levels and no definitive word from OPEC and the Russians that they are going to extend the cut or deepen it, the rally seems to have lost its momentum,” Gene McGillian, a market research manager at Tradition Energy, said in a Bloomberg interview.

That reaction seemed to be widespread on Monday. “I think that without the support of products and Brent, the market may get dragged lower in the near term as it’s apparent that the market doesn’t care much about OPEC already jawboning about an extension of the deal,” Scott Shelton, a broker at ICAP, told Reuters.

The ironic thing is that while OPEC ponders more drastic action, there are signs that U.S. shale is actually not doing as well as everyone thought it would be at this point. Production is up, but signs of strain are showing. The rig count fell last week, after weeks of unimpressive gains. The slowdown suggests the industry is becoming more cautious, particularly with oil prices running out of steam.

In fact, some cracks are becoming visible in the Permian basin, often cited as the most attractive shale basin in the U.S. Costs are on the rise and some drillers are running into production problems. Production is up, but profits are scarce. Related: Aggressive OPEC Pushes Oil Prices Up

That could lead to a wholesale rethink for the industry—the days of explosive growth in the shale patch could be coming to an end. A growing number of investors are demanding that E&Ps slow down and focus on profitability, which will likely come at the expense of the industry’s blistering growth rate.

OPEC has yet to enjoy the fruit of this potential receding tide of shale drilling—oil looks softer than it did a few weeks ago and hedge funds and other money managers have pared back their bullish bets lately, a harbinger of more cautious sentiment.  

But while OPEC is nervous about near-term oil prices, and is planning “extraordinary measures,” they can at least take comfort in the fact that the shale bonanza is moderating.

By Nick Cunningham of Oilprice.com

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  • Neil Dusseault on October 10 2017 said:
    Why are we pretending at this point?

    OPEC's Barkindo and Russia's (part of NOPEC) Novak are puppets for the Saudi King, the Saudi prince ("MBS") and of course, Khalid Al Falih.

    All this jawboning and never actually doing anything is for the sole purpose of 'Vision 2030' so that KSA has enough money before its IPO of Aramco next year so that can generate enough revenue in only 12 years to literally ween the Saudis off oil entirely...but at who's expense?

    Everyone else, especially U.S.A. And, in the meantime, KSA remains one of the top importers of arms in the world--what could go wrong?!
  • Fred Vogel on October 11 2017 said:
    Thank you Nick, for an excellent analysis.

    What the world economy needs is stable and affordable oil prices. The transition to renewable is picking up speed, and in order for oil to continue being a staple for as long as possible, it would be smart for the producers to accept, and work within, a fair price range in the region of USD 35-50 for both Brent and WTI.

    New smart production methods are opening up the market for independent producers, at lower cost. Advances in digital analysis make this possible. Costs for transport and refining have already started the adjustment to lower prices from now on.

    Attempts to manipulate prices upward by cartels such as OPEC and collaborators (Russia), are bad for the world economy, and against the efficient functioning of the market. The world should not support authoritarian regimes by giving them windfall profits in low-cost environment. This is not just for political and legal reason, but low oil prices make economic sense.

    By maintaing oil prices steady and low, producers can make sure that oil will continue to be an important commodity for the long-term. By pushing the prices unreasonably high and continually volatile, additional efforts will be made with alternative fuels to make oil obsolete altogether, even faster.

    Best regards

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