On Monday, my wife Marina and I made it back from Brazil, but I hit the road again. This time I’m in New Orleans, a city I called home some 35 years ago when I was teaching at Tulane University.
Yesterday I made my keynote address here at the International WorkBoat Show and Annual Conference. In my address I provided my latest views on the global energy picture to an audience made up primarily of representatives from offshore support and transport companies.
As I noted in my address, the focus of attention has once again turned to the ongoing global oversupply of oil and the prospect for pricing improvement moving forward.
And that draws our attention to Vienna…
Tomorrow, OPEC will meet in the Austrian capital. While there is some discussion of a possible “production balance” being struck between the cartel and outside producers like Russia, Kazakhstan, and Mexico, there are several things to keep in mind.
Here’s my take on what will happen in Vienna… and how it will affect the global oil picture…
The Three Main Points to Remember About the OPEC Meeting
Second, any agreement will most likely amount to little more than a million or so barrels of oil a day being cut from aggregate OPEC production.
Third, this may be one of the most difficult accords to fashion in recent memory.
OPEC is currently producing well above the levels approved by the organization’s monthly quotas. That is because cash-strapped members are evading the quotas and selling into an already satiated market in a desperate attempt to collect essential revenue.
All OPEC countries, including Saudi Arabia, are running heavy budget deficits as a result of the decision to defend market share rather than price. Aside from the Saudis, Kuwait, and the United Arab Emirates, just about all other members are now in public support of production cuts to buttress prices.
That has set up a situation in which Riyadh must orchestrate an agreement with non-member producers to cut back on forward production. That will allow the Saudis to claim a victory and take their football home.
Opposition to Policy Within OPEC
A million-barrel cut (while certainly a move in the right direction) would still result in an overall level about the same as the Saudi-engineered move that took place on Thanksgiving Day 2014.
That move signaled a change in OPEC policy. Previously, when global supply exceeded global demand, the cartel would serve as the international balancer by reducing its own exports. However, this time around the Saudis led a decision to defend market share, allowing the price to move down significantly in the aftermath.
The financial pain caused in member states like Venezuela, Nigeria, Iran, Algeria, Libya, and Ecuador has been intensifying, with opposition to the Saudi production hold rising right along with it.
OPEC is now straining to keep a cohesive strategy in the face of internal rising opposition.
Still, the million-barrel cut would bring about a certain balance, and that would probably add another $10-15 a barrel to the price of oil in the short run (by April, because the move – if agreed to – would not occur until the first quarter of next year).
An Additional Cut Would Be a Greater Price Stimulus
This brings us to some of the figures I presented yesterday here in New Orleans. Currently, the international oil market will end the year at an average increase of 2.5 million barrels of production a day. Demand will average an increase of 1.8 million barrels a day worldwide.
It is important to remember that, while the pundits have fixated on the supply-side surplus (where the primary pressure for reduced prices has taken place), global demand has not declined. In fact, we will end 2015 with the highest daily demand figure in history: around 94 million barrels a day.
By my calculations, at the moment we are running a 700,000 barrel a day surplus in new production. A million barrels taken out, therefore, would balance supply and demand. However, the prospects for 2016 from that cut would be even better.
Now, it is a very difficult proposition to try to predict demand during any protracted period of time. OPEC and the International Energy Agency (IEA) are the best in the world at doing this, and each had to revise figures a number of times during 2015.
But the present figures look like this: International demand should continue to rise by about 1.2 million barrels a day, to 95.3 million barrels by the end of 2016. Production, on the other hand, is forecast to decline by nearly 800,000 barrels a day.
In other words, even without an engineered cut of 1 million barrels from an OPEC/outside producers’ agreement, the market would balance on its own.
In that environment, the additional million-barrel cut will be an even greater stimulus to prices.
An Accord on Asian Entry for Russian Crude May Be Key
But the devil is certainly in the details. In this case, any accord with other nations also relying on oil revenues to cut production (and exports) is a dicey proposition at best. Take Russia as the primary example.
Moscow is running its own expanded budget deficit due to the low price of oil. Russia requires oil sales abroad as an essential component of that budget and has been punished significantly by the decline in prices. Yet Russia also has resisted any outside attempt – especially by OPEC – to control what it exports.
In the past, Russian policy has paralleled OPEC’s only when there was something in it for Moscow. That makes this attempt to reach a mutual production cut very difficult.
Nonetheless, keep your eye on exports to Asia. One of the immediate objectives contained in the Saudi move at the end of 2014 was to drive the oil price below the level at which Russia could begin competing in the expanding Asian market.
Moscow has completed the huge Eastern Siberia-Pacific Ocean (ESPO) pipeline and wants to move crude to Asia that is actually of better grade than Saudi export. The collapse in oil prices has made that uneconomical.
An accord on Asian entry for some Russian crude may be the key.
As for the main OPEC producers, the situation remains defending market share in the face of certain rising unconventional production worldwide. As I noted yesterday in my WorkBoat presentation, the U.S. may be first up with shale and tight oil production, but it controls only 26% of what is available worldwide from the new sources and only 5.4% of the total oil available for production.
That makes the global OPEC strategy more difficult.
I may be able to poke around for some answers next week. Marina and I will be in Abu Dhabi, where the Persian Gulf production perspective is centered. I’ll let you know what I discover.
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