Thought piece

[The remarkable production capabilities and transportation system for US oil and natural gas continue to change the world and its geopolitics. As predicted, OPEC’s strangle hold on energy is officially over.

Along with it, OPEC is losing its political clout with its own people, who are now suffering from its governments’ failure to provide the basic goods and services to them. And the OPEC nation’s individual governmental instability is likely to worsen, which will make it increasingly harder for each of them to act in concert.

Chief among the reasons for this new paradigm, the growing abundance of North America’s shale oil, the continued lowering of total production costs and the growing sophistication of pipelines and transmission systems. Also, the quality of oil being produced make it much more environmentally friendly.

In terms of federal regulations, the Chevron Doctrine–a rule by which judges defer to federal agency officials interpretation of laws and regulations–probably won’t create the kind of financial uncertainty witnessed in the last five years. The flurry of new energy investments in the US is proof of that.  Steve]

 

OPEC Faces Quandary as U.S. Oil Inventories Swell

 Oil cartel’s cuts are helping competitors fill their storage tanks

By Sarah McFarlane, Summer Said and Georgi Kantchev The Wall Street Journal

Updated March 9, 2017 11:00 a.m. ET

The brimming U.S. crude inventories that sent oil prices tumbling this week are expected to put pressure on the Organization of the Petroleum Exporting Countries and other producers to extend their historic agreement to cut output.

However, OPEC members face a familiar quandary: their cuts are helping U.S. and other competitors keep those storage tanks full.

OPEC and big producers like Russia agreed in December to reduce output by 1.8 million barrels a day for six months from January, in a bid

The latest production data indicates OPEC members have cut, for the most part. But investors are impatient for proof that inventories are actually falling.

Weekly data from the U.S. Energy Information Administration, published Wednesday, showed domestic crude stocks at a record weekly level of 528.4 million barrels. The data sent oil prices skidding by over 5%, in their biggest one-day plunge in more than a year.

On Thursday, oil prices remained volatile, with Brent crude, the global benchmark, down 0.63% to $52.78 a barrel and West Texas Intermediate futures 0.72% lower at $49.92 a barrel.

“We are probably losing a bit of faith in a rapid impact of these production cuts,” said Harry Tchilinguirian, head of commodity strategy at BNP Paribas SA.

OPEC data suggests that members have carried out around 86% of the agreed cuts—a higher-than-expected compliance rate for an organization with a history of not sticking to such deals. OPEC officials have estimated compliance by non-OPEC producers, including Russia, at around 50%.

That might not be enough to draw down the massive glut of crude that has depressed prices for nearly three years. The International Energy Agency estimates that at the end of 2016, stocks in the 35-member states of the Organization for Economic Cooperation and Development were still 286 million barrels above the average of the preceding five years.

OPEC’s officials have said their agreement’s success will be measured by how effectively it forces oil traders to sell off stored petroleum.

The organization’s secretary-general, Mohammad Barkindo, has said OPEC wants global oil inventories to reach the five-year average in 2017. If that hasn’t happened by May, OPEC officials say they are open to discussing extending the cuts.

Robert McNally, the president of energy consultancy Rapidan Group and a former White House policy adviser, said OPEC and non-OPEC producers were likely to consider extending the cuts.

The energy minister of Saudi Arabia, OPEC’s most influential member, sent mixed signals this week at an oil conference in Houston. Khalid al-Falih said OPEC wouldn’t bail out the market and that he was concerned that production cuts “underwrite the investments of others at our own expense and long-term interests.”

Mr. Falih’s position has shifted from January when he suggested a deal extension wasn’t necessary and that the cuts were simply meant to accelerate the stockpile drawdown. However, in Houston, Mr. Falih said OPEC would look at inventory levels in May as it evaluated whether to extend the production deal.

A Saudi OPEC official said it would take at least three months to ascertain the impact of the production cuts on inventories, especially in the U.S.

“We have to wait and see what happens and assess how the market is responding and if there is a need for the deal to be extended, we will do,” he said.

This week, both Russia and OPEC member, Iraq, said it was premature to talk about extending the agreement. However, that was before the latest U.S. inventory numbers.

“If OPEC doesn’t extend the deal that would be price suicide, plain and simple,” said Tamas Varga, analyst at London-based PVM brokerage.

Still, OPEC’s cuts have lifted prices to levels that make swaths of U.S. shale production economical again.

Oil prices are more than 10% higher than before OPEC agreed to act. This adds to the possibility that the cartel’s cuts will continue to be offset by U.S. shale producers increasing output. The EIA expects U.S. production to reach 9.5 million barrels a day in 2018—a level last seen in April 2015.

That makes an extension to the deal more challenging. Much of OPEC’s compliance is down to Saudi Arabia, which has reduced its output by more than it agreed to. Some analysts question how long the world’s biggest oil producer will bear the brunt of the cuts.

“For every month that OPEC is scaling back their output, U.S. shale drillers get a chance to gain more market share,” said Tom Pugh, a commodities analyst at Capital Economics. “The Saudis might say enough is enough at some point.”

—Neanda Salvaterra contributed to this article.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com, Summer Said at summer.said@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

By | 2017-04-03T22:50:21+00:00 March 14th, 2017|Categories: Energy, Thought Piece|Tags: , , |0 Comments

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