OPEC oil production comes primarily from conventional reservoirs. These reservoirs require reservoir pressure management. Some have suggested that Saudi Arabia’s rationale for cutting production was to reverse the reservoir damage that overproduction has, or may have, caused. Preservation of reservoir integrity may ultimately limit “immediate” increases to inventories from OPEC.
The temptation to cheat on quotas undoubtedly rises as prices rise, but this will occur in a universe populated by mostly long established fields for which pressure drawdowns due to years of production have left reservoirs in a delicate balance. So it’s quite possible that even if cheating IS encouraged by member nations, long term damage to ultimate cash flow may occur if the cheating barrels are sourced from mature fields.
The geopolitical landscape is absolutely teeming with heightened tensions and potential black swan events.
Inquiries into Russia’s hacking activities, possible re-imposition of Iran sanctions, the increasingly desperate Venezuelan situation, China’s seizure of a U.S. Navy drone and desired control of shipping lanes in the South China sea—not to mention the destabilizing end game in Syria—are likely flash points that could easily escalate into violence that could greatly hamper the ability of OPEC oil to get to market. It’s a good bet that supply interruption, rather than global demand strength is a more likely foundation for future price variability in crude.
If reservoir damage worries are a fact of life for many OPEC producers, U.S. unconventional producers may ultimately be the long-term winners in a universe of rising prices (assuming that OPEC acts rationally for long term gain, rather than to staunch short term cash flow problems.)
By Mark Nibbelink via Drillinginfo.com
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