Mixed signals from Opec’s unchanged stance
● The fall in drilling activity is yet to produce a decline in US oil production. The experience gained and improvement in efficiency allowed shale oil producers to do more with less.
Now that more than two weeks have passed since the end of the Opec ministerial conference in Vienna, perhaps one can view the prospects in the oil market in a better light.
The decision to keep the production ceiling at 30 million barrels a day (mbd), was probably the only thing Opec could have done under the circumstances. Influential Opec members still insist on seeking a higher market share for them and for the organisation as a whole.
In this regard, they probably would have liked to increase the ceiling. Other members who are less able financially probably wanted the organisation to cut production to raise prices. Therefore, keeping the production ceiling unchanged was the compromise Opec sought to appear united.
The perception before the conference that Opec may increase the ceiling is clear in price movements just before the conference. The price of the Opec basket of crude oils fell from $62.26 (Dh228.49) a barrel on June 2 to $58.61 on the day of the conference, only to start rising to $62.14 as the conference ended on June 11.
Prices now are moving in a narrow range just above $60, which looks like a resistance level for the prices now.
The highest price the basket achieved this year is $64.96 in early May after rising from almost $44 a barrel mid-January. In fact Opec’s Oil Market Report of June says the average for May stood at $62.16. The “bullish factors” are said to be an increase in crude oil demand and the firm pricing of refined products prices in addition to inventories drawdowns. (But overall inventories are much higher than what they were last year or the average of the last five years.)
For the rest of the year and beyond the signals are mixed. Some analysts believe prices are on the way up again and they say that the active drilling rigs in the US fell from 1,920 in mid-August 2014 to 645 in mid-June 2015. This has been instrumental in the rise of prices since January.
But the fall in drilling activity is yet to produce a decline in US oil production. The experience gained and improvement in efficiency allowed shale oil producers to do more with less and to hold on to their production so far.
Of course there is a limit to this and the US Energy Information Administration does expect a fall in shale oil production by “1.3 per cent to 5.58 million bpd this month” and “it will drop further in July to 5.49 million bpd” according to Bloomberg’s Lynn Doan on June 9.
Gaining market share
At this rate Opec has a long way to go. But Opec is really baffling. On the one hand it is seeking to improve its market share and on the other hand the conference President and Qatar’s Oil Minister Mohammad Saleh Al Sada questioned the investment cuts in the industry which would lead to reduced supplies.
He said at the end of the conference “The degree of investment cuts is substantial due to the oil price of today.”
But isn’t this the only way for Opec to gain market share? He also said that Opec countries had to invest heavily to replace an average 5-6 per cent natural decline in oil production from existing wells. This is true and it is the price that Opec has to pay to gain market share, which coupled with the decline of its revenues is indeed a high price.
The other view in the market is for oil prices to resume a downward journey. Saudi Arabia is producing 10.3 million bpd, the highest in 30 years, and said it would boost production if the market demanded. Iraq is set to increase production and if the sanctions on Iran are lifted, there is a potential production of 1 mbd coming though it will take some time before production can increase by so much.
At the same time Iran has 40 million barrels stored in tankers and ready to be sold as soon as sanctions are lifted. Non-Opec supply is set to increase by 680,000 bpd this year.
All these in addition to the slow decline in US shale oil production are leading some research institutions, according to Global Times, to “predict that Brent will remain around $60 per barrel in the next 10 years” though “others have warned that oil prices could soar to $200 per barrel if investment in the sector remains low”.
The question is how long can Opec endure to see which view is going to prevail?
■The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.
● Iraq is set to increase production and if the sanctions on Iran are lifted, there is a potential production of 1 mbd coming though it will take some time before production can increase by so much.