Major oil-producing countries to the rescue? That’s a fantasy
Sorry, Texas. OPEC and Russia are not going to save the North American shale oil revolution.
Too many analysts and oil and gas executives are clinging to a fantasy in which the world’s largest oil-producing governments divvy up the energy market in a way that satisfies the 19 countries that produce more than a million barrels a day of petroleum. In this dream sequence, oil companies then adhere to the quota and triple the price of oil so that everyone can make a decent profit at $90 a barrel.
That’s pretty much what Russia’s and Saudi Arabia’s oil ministers have said is necessary to take 1.5 million barrels of surplus oil off the market. Since that won’t ever happen, those ministers joined Venezuela and Qatar on Tuesday in offering to freeze exports at January 2016 levels to stabilize prices — but only if other governments agree to do the same.
That last condition, which Saudi Arabia and Russia add to every proposal made to manipulate the market, makes the new proposal dead on arrival. What they are really saying, using diplomatic language, is that Iran and Iraq must drop their bids to sell more oil, and that’s a pledge neither country can make.
Iran’s government just traded away years of nuclear weapons development to save the country’s economy, and the pressure to deliver is on. Moderate Iranian President Hassan Rouhani’s future depends on boosting oil exports by a million barrels a day, attracting $200 billion in foreign investment and raising the average Iranian’s standard of living. He can’t afford to freeze exports unless he wants to hand power over to hardliners in the 2018 election.
In neighboring Iraq, Prime Minister Haider al-Abadi boosted exports to finance his government’s battle against Islamic State. Total revenues, though, have slipped, and the national oil company has had a
hard time paying foreign contractors.
Other members of OPEC, notorious for cheating on past quotas, are equally desperate. Nigeria, Venezuela, Angola and Ecuador face economic collapse, and those governments must maximize production to raise hard currency.
Antitrust laws, meanwhile, prevent private oil companies from participating in any agreement to manipulate the market. Producers in the U.S., Canada, Brazil, Norway and Mexico represent a quarter of global production, and will act independently.
U.S. companies are also competing for the first time in decades on the global market and began exporting crude last month, something executives told Congress would save the industry. Since then, the price for Brent, the international benchmark, has closed in on the price for West Texas Intermediate, the U.S. benchmark.
That smaller differential has made imports more attractive to refiners on the East and West coasts, according to Platts, a data company that tracks energy prices and inventory. Iraq and Saudi Arabia offered substantial discounts off the Brent price to secure greater U.S. market share, the company noted.
Imports rose 480,000 barrels a day in January compared with last year, averaging 7.86 million barrels. That offset a 417,500-barrel-a-day cut in U.S. shale production, Platts reported, and increased crude and refined product inventories. U.S. exports were minimal.
“While the U.S. will likely continue to import significant volumes of crude in the foreseeable future, the import/export balance is likely to see only moderate increases on the export side from the current 600,000 barrels a day,” Platts concluded.
Global energy markets are simply too complex and geopolitically fraught for a handful of producers to manipulate crude prices. While an unexpected, violent attack on the oil supply could send prices skyrocketing, the fundamentals of supply and demand control the day-to-day market to the benefit of low-cost producers.
Prices are floating at $30 a barrel, far below the price needed to add new wells, because there is a 1.5-million-barrel daily surplus, and storage tanks are filling up. Demand may grow 1 million barrels a day by the end of 2016, but that’s about equal to what Iran wants to add to the market. Only natural well decline absent new drilling will balance the market, and that will take at least a year.
Unfortunately, small U.S. companies that drill and hydraulically fracture horizontal wells are on the wrong side of the price point. About 60 U.S. exploration and production companies are at risk of bankruptcy this year, according to consulting and accounting firm Deloitte.
“We could see E&P bankruptcies surpass Great Recession levels,” said John England, Deloitte’s vice chairman and U.S. oil and gas sector leader. “Access to capital markets, bankers’ support and derivatives protection, which helped smooth an otherwise rocky road for the industry in 2015, are fast waning.”
Smartly managing the best reserves to produce the cheapest oil is the only way to survive this market. Believing OPEC’s and Russia’s weekly press releases intended to manipulate the market is not.