National Post (National Edition)
FINANCIAL POST
OPEC HUNTS FOR A DEAL WHILE U.S. KEEPS PUMPING OIL.
CALGARY • The nationalist policies of president-elect Donald Trump are unlikely to sway next week’s OPEC discussions, even as U.S. shale players gradually claw back market share from struggling cartel members, analysts say.
Ministers from the 14-nation Organization of Petroleum Exporting Countries are meeting in Vienna on Wednesday to clinch an output deal first negotiated in September.
Saudi officials are scrambling to bring the fractious group together — particularly Iran and Iraq — as well as convince non-OPEC ally Russia to take part in the cut.
The cartel will meet in the looming shadow of president-elect Trump, who has vowed to “cancel job-killing restrictions on the production of American energy, including shale energy...” on the first day of his presidency that begins Jan. 20.
Most market observers remain unsure how Trump might actually implement his policies when he officially takes over the White House. That speculation involves whether he could provide a boost to debtladen U.S. shale companies, whether through deregulation or lower corporate tax rates.
U.S. shale companies have already proved more resilient than many observers expected, mostly by paring back operating costs. That has in turn put a damper on attempts by some OPEC members — especially Saudi Arabia — to push prices lower as a means to force competitors out of the market.
But OPEC worries are unlikely to influence discussions in a meaningful way, says Chris Main, an analyst at Citigroup based in London, particularly with benchmark oil prices close to US$50 as markets balance out.
“It’s kind of shifted the focus where now you’re likely to see growth in the U.S., with or without an OPEC cut,” he said.
Overall U.S. oil production has steadily declined since OPEC decided to cut its output in late 2014. According to the U.S. Energy Information Administration, production fell to 8.7 million barrels per day in August 2016, down from an April 2015 peak of 9.7 million bpd.
However, drilling activity in some of the U.S.’s most prolific basins — the Permian, Eagle Ford and Bakken — began to pick up after prices for benchmark crude West Texas Intermediate broke the US$50 threshold in October. Growth in those regions is expected to continue, analysts say.
And yet, that growth is unlikely to improve substantially under Trump, said Bart Melek, the head of commodity strategy at TD Securities in Toronto. U.S. shale producers might see their capital costs shaved down slightly under president-elect Trump, but those debt-laden companies will nonetheless have difficulty funding future growth projects.
“Trump is not going to change the threshold of capital,” he says. “If I’m a big oil producer that wants to invest in U.S. shale, and I’ve said that I require US$60 oil before I am willing to invest, Trump isn’t going to change that.”
Moreover, major policy changes are unlikely to take place anytime soon, he said. “There will be stalemates all over the place; this won’t go anywhere near as quickly as some market observers think.”
Meanwhile, OPEC members are attempting to present a united front as they enter into discussions over a potential production freeze.
The cartel collectively pumped out 33.83 million bpd in October, according to the International Energy Agency. In their September meeting in Algeria, OPEC agreed to reduce that figure to between 32.5 and 33 million bpd.
It’s unclear where specifically those cuts would come from. Iraq and Iran have both claimed they should be exempt from the quota, as the two countries work toward replacing output that has been lost in recent years. Iran has said it won’t freeze production until it reaches a four million bpd threshold. It is currently sitting at between 3.6 and 3.9 million bpd, based on estimates.
Nigeria and Libya are also likely to be exempt from a freeze, various media reports have said, as the two countries desperately try to replace lost production amid local strife.
Saudi Arabia’s energy minister Khalid al-Falih said on Sunday that he believed the oil market would balance itself in 2017 even if producers did not intervene, and that keeping output at current levels could therefore be justified. Falih said on audi Arabia was sticking to its position on the Algiers agreement that everyone should co-operate, Reuters reported.
“We expect the level of demand to be encouraging in 2017, and the market will reach balance in 2017 even if there is no intervention by OPEC. But OPEC intervention aims to expedite this balance and the market recovery at a faster pace,” he said.
Still, there is a growing consensus among analysts that the group will reach a deal, especially as spare capacity is now limited almost solely to Saudi.
Another reason is the ongoing struggle by OPEC to remain relevant in a segregated energy market.
“The costs of failure have gotten higher and higher, because they’ve tried to regain some credibility keeping the charade of OPEC up,” said Main.
TD has pegged its estimate for WTI to average US$60 per barrel in 2017. If OPEC members can present a credible deal, he says prices could continue to climb upward as capital investment in upstream oil and gas projects remains low, leading to diminished future supplies.
“We’ll have a situation where demand outpaces supply, and then we get into deficit territory,” Melek says. “But you need an OPEC cut for that to happen.”