By David Llewellyn-Smith, founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Originally posted at MacroBusiness

From CLSA:

  • At the conclusion of the Algeria meeting, Reuters is reporting OPEC has agreed to limit production
  • The agreement would be finalized at the next OPEC meeting on November 30, 2016
  • OPEC is supposedly limiting its output to 32.5 mmbpd, which is effectively where OPEC was in January 2016.
  • But in August, output reached 33.47 mmbpd, which implies a 1 mmbpd cut.
  • The delta from August output levels is contributing to the market jolt
  • But remember, Saudi Arabia oil output spikes in the summer due to cooling demand
  • What is unclear is Iran and Libya
  • Iran is at 3.6 mmbpd with a target of 4.2 mmbpd…and a staunch resistance to freezing until reaching 4.2 mmbpd
  • Libya is at 0.3 mmbpd with a target to recover to 1.0 mmbpd by year-end (aggressive)

Saudi Arabia oil output


All-in, if the 32.5 mmbpd number is accurate, then OPEC is rolling back to January levels, which is effectively what it had previously suggested it might due. The market response is not surprising, but probably not sustainable either. The devil is in the details and we still do not know how Iran and Libya fit into the equation, or if this is just another proposal that will be dismissed by Iran.

Shale oil economics are an increasingly convincing and credible source of supply growth. Initial production rates have jumped 50 – 100% just in the span of a few years. Spud-to-pipe times have also dropped to 135 days for a pad of three wells, down 13% from 2015. Oil prices sustained in the low $50s is the level that seduces more capital in shale…thus Saudi better be careful what it wishes for. We already expect supplies to flatten out in the US in early 2017 with limited increases in rig activity. A rebirth of activity could prompt a rapid rise in US oil output within 6-months, offsetting OPEC’s efforts once again.

Note – possibly negating the some of the potential impact of this news. Russia, the world’s largest energy exporter, is reportedly on course to pump a post-Soviet record amount of oil in September, adding as much as 400,000 barrels a day to the country’s production.

Who is going to cut? Iran? No. Iraq? No. Libya? No. Nigeria? No. The tiddlers? No. Maybe Kuwait but without the others?

Saudi is nodding at itself in the mirror. It cuts unilaterally or there is no cut.

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  1. TheCatSaid

    How will this impact Venezuela? Some have said that important aspects of US oil/gas policy are designed to crush the Venezuelan Bolivarian regime, because having a “not-conforming-to-US-dictate” country in its own hemisphere is not acceptable to the US hegemon.

    Could Saudis be trying to punish USA just a little for the Senate vote re: 9/11?

    1. digi_owl

      I wonder if Venezuela is simply caught in the crossfire.

      Best i recall, their oil is of a heavier and more difficult to work with type. Thus the price needs to be higher before refineries will be willing to buy it.

  2. PlutoniumKun

    I think its pretty clear, as the headline implies, that OPEC has become increasingly meaningless and powerless. SA can’t seem to impose itself anymore – its only influence is through its raw pumping power. If it wants cuts, it will have to take on nearly all the burden, nobody else can afford to do it.

    Given how opaque oil economics is, its difficult to know who exactly is making money at current prices. I’m deeply suspicious of figures for tight oil, as there is a huge incentive there for producers to claim low costs which in reality will be unreachable, especially as the sweet spots are depleted. And there are complicating interrelationships, such as the need for heavy crudes from Canada and Venezuela to mix in with light tight oil in order to use existing refineries (each refinery is ‘tuned’ for specific grades, so crude is not as fungible a product as often assumed).

    Traditionally, the Saudi’s pump oil during an election year to help the incumbent, on the assumption that he’s been a good boy and done what they have asked. I assume they are in Hilary’s corner this time, good feminists that they are, so I’d suspect this will have an impact on their decision making. But they seem undecided at the moment as to what their priority is – raising more cash for their stupid and vicious war in Yemen, or killing off unconventional oil.

    1. Jim Haygood

      Now the Saudis are in such dire cash flow straits that they probably can’t AFFORD to cut production — they need the money.

      Plus they know from sad experience that their cuts would be offset by others, grabbing a little lagniappe [New Orleans speak for ‘extra’] at their expense.

      Too bad they can’t just chop some heads to enforce a little discipline on the organization that the late Alan Abelson of Barron’s used to mock as “OyPEC.”

      1. PlutoniumKun

        Yes, that’s the issue – I wonder if the Saudi’s are scared that even a deep cut – say 2 MBD – would just be off-set so prices wouldn’t rise enough to compensate. This is one reason of course why they have been so aggressive at fighting for market share specifically.

        However, I wouldn’t discount their deep strength in the market – not least because Saudi oil is by far the cheapest to produce in the world.

  3. Pwelder

    “Fade Opec” ?? There you go again, a-punditing in an area outside your wheelhouse.

    Bear in mind that the immediate media reaction to the Algiers meeting is coming from presumed experts who – all of them – assured us that nothing important would happen there.

    (Except for Ms. Croft – formerly of the CIA, now a newbie O & G analyst with RBC. I saw her for the first time late yesterday afternoon when she got to opine on one of the CNBC shows. That was one happy lady – looked like the cat who swallowed the canary!)

    But getting back to the fundamentals: Did you happen to notice that the EIA just reported the fourth straight week of surprise declines in US crude inventories? That’s not supposed to happen this time of year, when the refineries shut down for changeovers and maintenance.

    Since November of 2014 the Saudis have been waging a war on the oil price, largely for geopolitical reasons. A principal tactic has been painting the tape, transferring inventories into jurisdictions where the reporting is relatively transparent. Turns out the Iranians and the Russians didn’t cave, much of the US shale industry found ways to cope, and the Saudis found that maintaining social peace while fighting a war is harder to do on $40 oil than they had thought. Plus that 9/11 bill that passed over Obama’s veto? That’s big, although not immediate. One way or another they’ll be needing quite a bit of cash. So they’re throwing in the towel.

    Yves, do not allow anyone you care about to short oil or the producers just now. And mark that post as one of the ones you won’t be including in your memoirs.

    All the best, PW

  4. John k

    SA exports 7.5 mm/day. How much would they have to cut on their own to double price, given Iran, Iraq, Libya, oil sands, plus of course US Production at 90/b? Maybe 3.5 mm/d? No net gain for poor SA.
    And this would encourage fracking elsewhere, plus resurgence in Mexico deep water etc and even Venezuela.
    SA no longer big enough to be the sole swing producer, they need the cartel… And cartel production has fallen too much vs ROW. OPEC is flat out because they’re all broke on account of vast corruption, plus massive population growth in SA, and they know even modest price increase brings out stupid speculators chasing elusive yield in the oil patch…

    And now imagine recession, not least because all oil patches slashing spending/jobs.

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