Opec, oil supply and pipe dreams

Canada’s province of Alberta should consider joining Opec. Albertan reserves and production rival anything in the cartel. Alberta’s government ordered a mandatory local production cut this week, the first time since 1980. After Brent crude prices tumbled 28% in the past month, onshore US producers will follow suit. Opec decisions may get the headlines this week in Vienna, but North America’s oil spigot turns a lot quicker. Tell that to Schlumberger, the largest US-listed oil services group. This week it noted that its North American fracking business had suffered a fast slowdown. Faster, that is, than six weeks ago when it warned about lower activity in its quarterly results. As one of the largest providers of services to explorers, what Schlumberger says matters.

From shale comes about half of America’s oil output, says the US Energy Information Agency. In the year to September, US oil production rose by nearly 2-million barrels a day, up more than a fifth. A fair portion of these barrels piled up in US storage, or was exported. Alberta’s own exported crude to the US could not find buyers.

Message received, it would seem, by North American drillers. Has Opec received the same message? One wonders. After the Jamal Khashoggi murder, Saudi Arabia wants to balance demands for lower oil prices from a supportive President Donald Trump with its desire to reduce supply. In 2018, Saudi Arabia has pumped more barrels to offset about 90% of the oil lost after Iran’s sanction-forced cut in output. Traders feel that a cut by Opec of no less than 1.4-million barrels a day will stabilise prices. But that looks aggressive, as the cartel would then return to 2015 levels of production.

Assuming Saudi Arabia still needs US support, a really big reduction in Opec quotas looks unlikely. But US and Canada will continue to react quickly. Get ready for more volatility in oil prices. /London, December 5