Crude Economics
“OPEC is Dead”

That statement was uttered by an OPEC official during its meeting in Vienna this week, by a delegate that, according to Reuters, sources represented a non-Gulf Arab member. And it doesn’t just seem to sum up the cartel’s frustrations on its inability to affect oil prices. It very well might be true. Reuters reports:

[E]vents at Monday’s meeting of OPEC governors suggest that if Saudi Arabia gets its way, then one of the group’s central strategies – of managing global oil prices by regulating supply – will indeed go to the grave. In a major shift in thinking, Riyadh now believes that targetting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend, according to sources familiar with its views. […]

Saudi governor Mohammed al-Madi said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so, sources say.

“OPEC should recognise the fact that the market has gone through a structural change, as is evident by the market becoming more competitive rather than monopolistic,” al-Madi told his counterparts inside the meeting, according to sources familiar with the discussions. “The market has evolved since the 2010-2014 period of high prices and the challenge for OPEC now, as well as for non-OPEC (producers), is to come to grips with recent market developments,” al-Madi said, according to the sources.

When we’re talking about OPEC, the only member that really matters is Saudi Arabia. Of the 32.25 million barrels of oil per day (mbpd) that OPEC produced in April, the Saudis contributed 10.12 mbpd, more than double the next most productive member (Iraq). Riyadh is the only member capable of realistically reigning back its output enough to affect the market, and historically has seemed willing to do most of the heavy lifting for the cartel in times of low prices.

Times have changed, though, and the country’s new man-behind-the-throne—the 31 year old deputy crown prince Mohammed bin Salman—has little interest in ceding Saudi market share in pursuit of higher prices while the rest of OPEC gets a free ride. This shift in thinking has been motivated in no small part by burgeoning non-OPEC supplies, upstart American shale production chief among them, which have threatened to dilute the effect of an OPEC production cut (as oil prices creep up, so too will U.S. output as more shale plays once again become profitable).

The global oil market is no longer dominated by a psychology of scarcity, but rather one of abundance. A sizable glut led to the price collapse we’ve witnessed these past 23 months, and it persists even with prices hovering (and perhaps finding a new equilibrium) near $45 per barrel, $70 cheaper than where they were in June of 2014. In this new world, the threat of OPEC dialing back its prodigious share of the world’s total crude supplies no longer seems as serious.

Famed oil guru Daniel Yergin declared last month that “[t]he era of Opec as a decisive force in the world economy is over,” and it seems as if OPEC’s members are slowly, begrudgingly starting to come to the same realization.

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