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Crude Economics
OPEC Runs Danger of Crying Wolf

Crude prices plunged to three-week lows earlier this week as doubts have started to grow about OPEC’s ability to follow through with its stated plan of cutting its collective crude output at its scheduled summit next month. When OPEC, Russia, and a handful of other petrostates met in Doha last April, they failed to agree on a deal to “freeze” production after the Saudis pulled out at the last moment. At that point, Iran was playing the role of spoiler, as it was unwilling to agree to any production constraints before it reached pre-sanctions levels. Now, six month laters, it’s Iran’s neighbor Iraq that is throwing a wrench in the works, as its oil minister sounded defiant this week on the prospect of Baghdad reducing its output as part of a coordinated OPEC effort.

Russia also declined to reduce its output—the state-owned oil firm Rosneft’s CEO recently suggested his company should be concerned with increasing production, not cutting it—and OPEC members like Libya and Nigeria will also be intent on boosting oil operations as they recover from recent supply disruptions. As Reuters reports, this is all adding up to an uncomfortable reality for Saudi Arabia:

Riyadh has historically shouldered the lion’s share of OPEC cuts. But if it took the same route this time, it could lose oil revenue if prices failed to rise while others increased production. The Saudis could also lose market share. “They (the Saudis) are desperate for a deal,” an OPEC source said.

Riyadh faces a second year of record budget deficits and is cutting the salaries of government employees, so keeping its output at current levels of 10.6-10.7 million bpd may not be economical…”They have tough choices. Clearly as Saudi production goes up, their costs go up too.” […]

“I expect it to be a very tough meeting,” one OPEC source said of the expert talks in Vienna. “If there is a cut, then everyone must cut. No exemptions,” the source said, commenting on Iraq’s demands.

Every oil producer on the planet would like to see prices spike upwards, but none of them want to do the hard work (read: cede market share) necessary to precipitate such a rebound. Within OPEC, the Saudis are the only player realistically capable of significantly moving the needle of global crude prices, and it’s looking like Riyadh will have to lift even harder than normal if it wants to cut away at the global glut next month.

As was the case with earlier freeze talks, whether OPEC cuts or not next month is going to come down to whether or not the Saudis are willing to bite the bullet. If they do, and prices tick upwards, it will be American shale producers who will react quickest as they work to ramp up production within projects that would suddenly become profitable once again. If they don’t, OPEC’s lack of unity will be laid bare for the third time in a calendar year, and its ability to move prices with pronouncements will be weakened, as well. That’s what happens if you keep crying wolf.

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  • Andrew Allison

    “If there is a cut, then everyone must cut. No exemptions,” End of story.

    • Kevin

      They can’t even agree on saying they will cut. Given the amount of lying and cheating that will go on with any agreement, this does not bode well for actual cuts occurring. (And that’s before non-OPEC actors boost production to take advantage of the situation.)

      I wonder if the Saudis miscalculated – perhaps they should have opened the spigots further in 2014 to drive some of their competitors to the wall rather than just inflict some pain.

      • Andrew Allison

        My point was that there’s no way in hell they’re going to agree to cut production and the breathless reportage on the possibility and ramifications is so much hot air. Since TAI seems compelled to remind us every couple of days that the price of oil has fallen by more than half, forgive me for reiterating that the US is the swing producer.

  • Jacksonian_Libertarian

    Who cares if the OPEC countries suffer? Everyone of the these horrible countries have Government Monopoly Owned State Oil Monopolies. All Monopolies including the Government Monopoly suffer from the same Disease, the lack of the “Feedback of Competition”. It is the “Feedback of Competition” that provides both the Information and Motivation which forces continuous improvements in Quality, Service, and Price in free markets.

    This means that none of the Monopolies will ever be able to compete with the small competitive companies developing shale oil with fracking. As is evidenced by the continued strength of these companies as they continuously improve all phases of their businesses, compared to the OPEC countries whose costs of production are rising as they foolishly spend money to drain their known fields faster.

  • Frank Natoli

    Not to worry. President Hillary Rodham Clinton is committed to shut down hydraulic fracturing, doubtless using the EPA Gestapo, and with that OPEC will regain control of supply and prices.
    Thank you, Democrat voters.

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