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Crude Economics
Can OPEC Erase the Oil Glut?

The collapse of the price of oil can be boiled down to very simple economics: supply outweighed demand. That truth helped drag crude prices down from a June 2014 high of more than $110 per barrel to a January 2016 nadir of less than $28, and it motivated the world’s petrostates to band together and cut their collective production to help erase that glut and send prices back up.

That agreement, hammered out in November and enacted this month, will run through June, and it has already brought oil prices back above $56 per barrel. OPEC’s members (and oil producers around the world) would like to see prices rise significantly more than they already have, but that won’t happen if the market isn’t balanced, which asks the question: will this cut of 1.8 million barrels per day be enough to erase the global glut? According to one hydrocarbon executive, there’s still a lot more work to be done. Bloomberg reports:

“We still have a significant global storage of oil, close to a billion barrels,” [Dana Gas CEO Patrick Allman-Ward] said Tuesday in a Bloomberg TV interview with Francine Lacqua at the World Economic Forum in Davos, Switzerland. Dana Gas, based in the United Arab Emirates, explores for and produces natural gas in the Middle East. Gas is often sold at prices linked to crude oil. […]

The potential for increased production from Libya and Nigeria will mean price volatility in crude for the rest of the year, he said. “There’s a lot of latent capacity in the system that is still not produced from Libya and Nigeria, and of course the oil shale is coming back in a big way,” the CEO said.

Bringing production levels down to be more in line with global demand will help stop the slide for producers, but it won’t be enough to eat away at the hundreds of millions of barrels still sloshing around in storage facilities all around the world. Reducing those stockpiles is going to take time, and those barrels will necessarily blunt the impact of these recent petrostate production cuts.

Of course, stored oil isn’t the only thing working against OPEC and Russia. As the Dana Gas CEO noted, Libya and Nigeria are chomping at the bit to restore lost production, a fact that will make those output cuts more difficult. But the real bogeyman for producers desperate for some price relief in the oil market are the American frackers, whose relatively high-cost production weathered the bearish market far better than anyone anticipated they would, and whose output has already started to climb. The U.S. is producing nearly 500,000 barrels more per day now than we were back in mid-October, and we’re once again knocking on the door of 9 million bpd. As prices climb, so too will shale output as producers are able to bring back online projects they shuttered over the past two and a half years.

This isn’t to say that achieving a market balance is impossible, however. The UAE oil minister, Suhail Al Mazrouei, told Bloomberg that he expects production cuts will reduce global oil stockpiles by the time they expire in June, and that effort will be greatly helped by China’s sputtering production, which is predicted to decline by up to 7 percent this year. But the glut OPEC and friends are targeting is huge, and their tools to take it on aren’t as strong as they used to be. And if you’re a petrostate oil minister, the one fact that will really keep you up at night is this: small, nimble U.S. shale producers are ready to snatch up whatever market share the Russians and OPEC are willing to cede for the sake of higher prices.

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  • FriendlyGoat

    Opinion polls show that Americans would “really” be happier with $3.00 gasoline than with $2.00 gasoline, especially if we can export a lot of oil and oil products and cut the income taxes of producer/exporter corporations by half or more, right?

    • Genesis123

      Thank god you are back with your obsession of lower taxes. I was starting to think you grew a brain. Thank God for both us that is not the case.
      Oil is a commodity. Look up what that term means. Then maybe you will realize how stupid your statement is. But then again, the Lightbringer, the Messiah, himself once referred to Canadian oil as “their oil”. It would be a stretch to assume you are more intelligent than the smartest man ever.

      • FriendlyGoat

        I’m just sarcastically pointing out that the same people who wish to push corporate taxes down “wouldn’t mind much” if the price of oil went up a tad in prices charged to the consuming public—-for the sake of the USA oil/gas business sector. It’s just that consumers don’t know that they are the “marks” in both of the games.

        • Genesis123

          Level of taxation has nothing to do with the price of commodity. If taxes were to go down, marginal costs would go down thus increasing the amount of oil produced and driving down the price.
          I’m sorry, but sometimes I forget just how little you understand of economics. It is truly mindboggling.

          • FriendlyGoat

            I understand enough of economics to know that a high price for a commodity coupled with a low income tax on profit from supplying the commodity means that wealth is gravitating upward from ordinary consumers to corporations and their shareholders. I also understand that it’s a lot harder for under-taxed free enterprise to find ways to get that wealth to flow back downward.

          • Genesis123

            You don’t see how incentivizing energy producers to produce more energy lowers the cost of energy? Like I said, your lack of knowledge of basic economics is quiet extensive. Thankfully, not everybody is as stupid as you are. For example, Mexico’s government-run oil company is arguing that too high taxes on its profits is preventing it from investing into exploration and increasing output. They are saying that lower taxes would increase their output. While you may not know what happens to a price of a commodity once there’s more of that commodity on the market, others do.
            Second, poor people pay a much higher % of their income to energy and thus benefit from lower energy prices a lot more than wealthier people. Energy prices can double and it wouldn’t affect my lifestyle; others are not so lucky. I’m sure as a reader of TAI, you are well aware of this journal’s feeling on the benefits of lower energy prices via shale.
            I guess my larger question is not whether or not you are willing to sacrifice the welfare of poor people for your ideology. The answer is that of course you are willing to sacrifice everyone if that’s what it takes.
            But why do you hate poor people so much? Why do you want them to remain poor? Shouldn’t you be trying to uplift them instead of sacrificing their lives on an altar of your own vanity? WWJD?

          • FriendlyGoat

            I am aware that improvements in hydraulic fracturing, horizontal drilling and technical precision in where to drill have produced the American oil revolution, the desperate attempts by OPEC nations to break that advantage with over-production to a glut and the resultant lower prices worldwide. All of this has occurred without tax cuts on even the oil/gas industry, let alone tax cuts on all business—–as now proposed by the GOP.

            The problem with the income tax cutting is that it will result in far more losses to the poor people than any benefit from any lower energy prices—-which have already bottomed anyway (which will be proven this year.)

            As you know (but don’t admit), tax cuts accompanied by the requisite spending cuts to compensate for the tax cuts DO NOT create jobs. The actual effect works in reverse.
            Neither do tax cuts reduce product prices.

          • Tom

            Your lack of understanding of how commodities work vis-a-vis manufactured goods is matched only by your determination to see to it that people not have access to money they’ve earned.

          • FriendlyGoat

            Gasoline and all other derivative products from oil ARE “manufactured goods”. You are spinning nonsense.

          • Tom

            In a sense, they are–but not in the same fashion, that, say, a car is. Come now, FG, you’re smarter than this.

          • Genesis123

            Every single country in the world lowers taxes when it wants more production. If you want more of something, tax it less. Why is that concept so hard to understand. I genuinely do not get it.

          • FriendlyGoat

            Maybe it would help if you separated the idea of “taxing something” from the idea of taxing the net profit from providing “something” (or some activity). They are not the same concepts. “Taxing something” is related to tariffs, sales taxes, consumption taxes, excise taxes, value added taxes and transaction taxes. Taxing profit is quite different and actually opposes the otherwise-natural tendency to over-pricing of the “something”.

            It might also help if you understood that not every activity conducted for profit is something we want more of. An excellent example of this would be one class of people simply finding ways to out-trade the other classes of people. Most people for instance are not particularly benefited by either George Soros or Carl Icahn. But you think we need to cut their taxes for some fantasy that it will give poor people cheaper gasoline.

          • Disappeared4x

            You should find this interesting, on the subject of what happened in Paris on 1/15/17, which is tangentially related with the price of oil, tangentially because Israel has shale oil reserves greater than Saudi Arabia has regular oil:

            Did not feel like going back to the last TAI posts that mentioned Israel, or why any tech company would move to London instead of Paris…but thought you’d like to read about both from the perspective of Melanie Phillips.

  • Fat_Man

    Serve them right to suffer.

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