RT Radio-Edinburgh’s Jack Foster interviewed me on the upcoming 30 November OPEC summit where the Saudis hope to set a cap on OPEC and Russian production. Here’s the interview: Listen from time-stamp 9:00-to-17:30 (Streaming MP3)
This would mark the first-ever Russian cooperation with OPEC. However, market realities look bleak for OPEC and Russia whether they reach an agreement or not. The reason is the unprecedented continuing challenge from US shale, which has dramatically cut its costs via tech and operational innovations to stay profitable at low prices.
Any agreement would undoubtedly have some effect boosting price, even if it’s merely an agreement to cap (not cut) production at the present very high rates that both Riyadh and Moscow have attained. But, fundamentally, it is now quite clear that the Saudi-led OPEC war on US shale since September 2014 – a race to low prices in hopes of undermining US shale and also knocking high-priced”inefficient” producers out of the market – has de facto failed. That is, US shale has survived and remains profitable. Not only has it dramatically reduced production costs with further tech and operational innovation, in addition these improvements have led the US Geological Survey to add some 20 billion more unconventional (i.e., ‘frack-able’) barrels to US reserves in West Texas’ Permian Basin.
Insufficient production has been forced offline in the USA and elsewhere by the Saudi’s low-price strategy to bring supply down in sync with demand.
Meanwhile the producers that the former Aramco chief, Al-Naimi, said would be undermined by low prices have turned out to especially include OPEC’s poorer, higher-population and generally inefficient producers – such as Venezuela, Libya and Nigeria – but it also hits hard at Iran, which is fighting to regain market share after years of sanctions, and at Iraq, which is struggling to finance a war against ISIS. All of these, save Venezuela, have asserted they have no interest or ability to participate in any Saudi/OPEC-plus-Russian production freeze or production-cut scenario. While they indeed need a price raise to survive, they cannot or will not take the additional hit to revenues these schemes would cause.
In the RT interview, we discussed the fevered shuttle diplomacy of Venezuela’s President Maduro. He has visited Iran, Saudi Arabia, Qatar and even Azerbaijan in October, and also met Putin in Turkey – desperately trying to get a deal to boost prices. It is not clear, however, what meaningful cuts his own government is willing to contribute as the country’s output has been in rapid decline due to the lack of cash for investments and the disarray in both PDVSA, the national oil company, and Venezuelan society generally under his increasingly dictatorial rule.
Meanwhile, the OECD’s IEA and USA’s EIA have both recently re-calibrated their earlier predictions of the global market re-balancing soon, saying it could be late in 2017 before oil demand and supply re-balance (see the latest EIA chart below here that projects about 1 million barrels/day excess production halfway into 2017).
This leads me to feel that the now-faint light, far off at the end of the low-price tunnel, will not brighten very much even with an “historic” agreement in Algeria at the end of November between OPEC and Russia.
The domestic-political and external-geopolitical consequences for OPEC states and Russia will be significant. (More on that soon.)
Corrections: OPEC’s upcoming 171st Ordinary Meeting date was a typo. It will be 30 Nov., not 20 Nov. Also, various syntax/grammatical tweaks. Then, clarification about different OPEC producers’ positions.