My CNNMoney quote & 3 points: OPEC v shale, Russia’s new role & Trump-buddy Hamm is pro Saudi price band

 

160928163540-opec-algeria-384x216I was interviewed by Matt Egan of CNNMoney. Three points, if I may:

  1. This story echoes my message in Berlin Policy Journal earlier this week and my RTRadio interview: OPEC now has to live with a new oil-market paradigm where shale  won’t disappear (for now its in the US, but soon elsewhere too).  It is a technology more akin to manufacturing than traditional oil extraction and so more amenable to technological and operating innovation in a low-price regime (or in a price war such as the Saudis et al have just given up on waging against it). And, being much smaller-in-scale means it can ramp up at much lower initial costs and more rapidly than traditional oil fields. The CNNMoney story is below here, or here’s the CNN ink .
  2. Another totally new phenomena seen in this OPEC deal was that a Russian leader was deeply involved in the tense OPEC negotiations, specifically between Iran and Saudi Arabia. Russia has never done this before. Historically, it has also never carried through on previous promises to support an OPEC cut, instead free-riding on higher prices effected by OPEC/Saudi cuts.  In this case, Putin was instrumental in getting the Saudi’s to agree, as they always have before, to swallow most of the cuts. But, Putin has agreed to cut too (in ambiguous language, but repeatedly). We shall now see if he and Igor Sechin (CEO of Rosneft, that produces 40% of Russian oil, and who is, by the way, a great friend of Venezuela’s miserably failing chavista leadership, where his company is now the biggest foreign oil producer) … do as they have promised OPEC and the Saudis. If they do not, the fallout with Saudis and their allies will be significant.
  3. Now, also, we shall see how US shale responds. Of course, IEA head, Fatih Birol, has understandably predicted that US shale and other producers, will likely hike production if oil reaches $60/barrel and simply eat up the present OPEC cuts in about nine months or so. (Aside: of course, the present output cuts, even if they ‘fail’ in the long run to sustain higher prices, would still have had been a significant cash-boosting relief to all OPEC states and to Russia while they lasted.)  However, take a look at the Bloomberg video link at the end of my Berlin Policy Journal piece – an interview with Howard Hamm, Trump’s billionaire fracking close-ally (who has just turned down an offer to run the Department of Energy). He had told Bloomberg he expects OPEC to make a deal because “it makes sense” and, further, that he expects/hopes his US fracking colleagues will show ‘discipline’ after the price rise, i.e., not expanding too fast so as to keep prices up.  An interesting, de facto recognition that price wars, in the end (in the long run), do not benefit either side, and goes on to approvingly say that the Saudi’s want to once again maintain prices “in a band” as they used to do. It is clear from Hamm that this would all be very welcomed from the US side. (Note, Hamm’s Continental Energy company made $3 billion in just three hours after the OPEC deal boosted prices! ) Indeed, in light of such everlasting market realities, it is difficult to imagine Trump’s attitude to the Saudi’s will be much different than other US president’s over the years. Which has geopolitical implications for Iran, of course, as the Saudi-Iranian geopolitical competition for regional influence and their parallel oil-market competition both continue to heat up.

Here’s the CNNMoney piece by M. Egan of 1 December 2016 (with my quote highlighted):

That fluttering sound you just heard was OPEC waving the white flag.

After a painful two-year price war against U.S. shale, the Saudi Arabia-led cartel finally blinked this week by agreeing to stop flooding the world with excess supply.

OPEC’s first production cut since 2008 reflects a recognition that hopes of drowning U.S. producers with cheap oil has failed to kill the American oil boom.

In fact, the price collapse crushed the budgets of Saudi Arabia and other OPEC producers, creating financial stress that was unthinkable just years ago. Moreover, U.S. frackers have emerged from the oil crash stronger and leaner than before. Now they’re positioned to ramp up output at prices that were once too low to survive on.

“OPEC realized they’re facing an impossible battle — and instead has retreated,” said Matt Smith, director of commodity research at Clipper Data.

Ultimately, OPEC decided the financial pain inflicted by the collapse of crude trumped the benefits of continuing to push out producers like the U.S. that tend to need higher prices.

“OPEC hasn’t been able to slay the dragon that is the U.S. shale boom,” Smith said.

Related: Oil prices skyrocket on OPEC deal

Saudi financial stress

While it is true that OPEC’s strategy did slow American oil production, others agree that OPEC’s price war missed its mark.

Saudi Arabia’s market share battle has “turned out to be a failed experiment,” Michael Tran, commodity strategist at RBC Capital markets, wrote in a recent report.

The price war has “left the Kingdom with little to show for its trouble besides burning through a quarter trillion of FX reserves, rising domestic tensions and a deteriorating market share position,” Tran wrote.

Budget stress brought on by cheap oil has forced Saudi Arabia to jack up gas prices and remove other generous subsidies, shelve projects that has cost jobs and contemplate an ambitious diversification of its broader economy.

Another crash in oil prices would have plunged Saudi Arabia further into the red and threatened the IPO of Saudi Aramco, the kingdom’s crown jewel whose debut as a public company could raise $100 billion.

Related: Saudis believe Trump will unleash America’s economy

OPEC sparks oil price spike

Of course, OPEC does have a number of things to be happy about this week.

It’s clear that OPEC proved it still has the ability to influence the markets in a dramatic fashion. It took three days of closed-door negotiations, but OPEC did cobble together a major deal between rival factions, namely Saudi Arabia and Iran.

OPEC should also be happy about the 13% spike in oil prices in the two days since the meeting in Vienna.

“The relevance of OEPC as an organization has strengthened significantly,” JBC Energy wrote in a note, calling the Vienna meeting “well-staged.”

Jason Bordoff, a Columbia University professor and former Obama energy adviser, said OPEC was able to “restrain” U.S. shale and “succeeded in cutting investment” in high-cost supply.

But the latest oil rally helps U.S. producers, too. That’s why shares of U.S. oil companies like Hess(HES) and ConocoPhillips (COP) skyrocketed on Wednesday.

“This was an extremely bullish production decision,” Jason Schenker, president of Prestige Economics, wrote in a report that oil could rise to $60 a barrel soon.

Investors are clearly betting the OPEC agreement, if it’s adhered to by self-interested members, will help fix the epic supply glut that caused prices to collapse in the first place.

Fitch Ratings predicted the deal “should help accelerate” the ongoing rebalancing in the market and raises the odds of a “more rapid” recovery in prices.

Sign up for CNNMoney’s morning market newsletter: Before The Bell

OPEC fails to wipe out U.S. shale

At the end of the day, the U.S. oil boom has fared much better than feared when OPEC launched the price war two years ago. The U.S. pumped 8.6 million barrels per day in September, down by 1 million from the peak of April 2015, yet just shy of the average level of 2014.

In other words, domestic oil output has dropped — but not fallen off a cliff.

“They weren’t able to wipe out shale. OPEC has to face the new reality that shale is going to be there,” said Thomas O’Donnell, a senior energy analyst at Wikistrat.

And many anticipate shale will emerge as one of the biggest winners from the OPEC decision.

Rystad Energy predicted on Thursday that the OPEC deal should allow non-OPEC shale oil production to rise by 1 million barrels per day in 2018.

While dozens of U.S. oil companies have succumbed to bankruptcy, the ones that have survived have been forced to become vastly more efficient. By cutting excess costs and rolling out new technology, these frackers are much more competitive than just a few years ago.

“U.S. producers are now able to pump more for less. That’s saved their bacon,” said ClipperData’s Smith.

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