OPEC’s Clash With U.S. Oil Is Nearing Its Day of Reckoning

 

  • Strategy of cartel has helped to deplete half surplus stocks
  • Bolstering prices is emboldening American shale-oil drillers

The clash between OPEC and America’s oil industry is reaching a day of reckoning.

The U.S. shale revolution is on course to be the greatest oil and gas boom in history, turning a nation once at the mercy of foreign imports into a global player. That seismic shift shattered the dominance of Saudi Arabia and the OPEC cartel, forcing them into an alliance with long-time rival Russia to keep a grip on world markets.

So far, it’s worked — global oil stockpiles are draining and prices are near two-year highs. But as the Organization of Petroleum Exporting Countries and Russia prepare to meet in Vienna this week to extend production cuts, ministers have little idea how U.S. shale production will respond in 2018.

“The production cuts are effective — it was absolutely the right decision, and the fact of striking a deal with Russia was crucial,” said Paolo Scaroni, vice-chairman of NM Rothschild & Sons and former chief executive officer of Italian oil giant Eni SpA. Nonetheless, “OPEC has not the same power. The U.S. becoming the biggest producer of oil in the world is a dramatic change.”

For OPEC members, the stakes couldn’t be higher. Saudi Arabia’s Crown Prince Mohammed Bin Salman is embarking on a radical economic transformation of the kingdom, including a partial sale of its state oil company that could be the largest public offering in history. Venezuela, reeling from years of recession and a crushing debt burden, is on the brink of political implosion.

Eroding Surplus

The producers’ efforts to clear the oil surplus are starting to pay off. They’ve drained excess inventories in developed nations this year by 183 million barrels, or more than half of the glut, which now stands at about 140 million barrels, according to OPEC data. That has revived London-traded crude futures, which sank below $45 a barrel this summer, to a two-year high of $64.65 on Nov. 7.

Losing Momentum

There are even signs that OPEC’s opponents, the dozens of drillers tapping shale-oil deposits in Texas and North Dakota, are losing momentum. Companies may have already squeezed costs and maximized productivity as much as possible, and their investors are finally insisting profits are returned to them rather than re-invested in more drilling.

Yet, the basic paradox confronting OPEC is that the more it succeeds in bolstering prices, the more it emboldens shale explorers and other competitors, said Mike Wittner, head of oil market research at Societe Generale SA in New York.

Increases in U.S. oil production next year will be big enough to cancel much of the sacrifices made by OPEC and Russia, leaving the surplus more or less intact, forecasts from the International Energy Agency show. The recent rebound in prices could energize shale even further.

Instead of being able to declare victory next year and restore the production they’ve halted, OPEC may find itself trapped in an open-ended struggle, Wittner said.

Catch-22

“Now that they’re in it, I don’t see how they get out of it,” said Wittner. “They need to continue supply management for the foreseeable future.”

The need to cooperate indefinitely could strain the Saudi-Russia partnership.

With U.S. crude exports climbing from close to zero three years ago to now exceeding the combined shipments of OPEC’s smallest members, it increasingly looks as if the face-off between the cartel and what was formerly its biggest customer “has an endgame,” Morse said.

“And the endgame is there’s an awful lot of shale in the world.”

Full article: OPEC’s Clash With U.S. Oil Is Nearing Its Day of Reckoning (Bloomberg Markets)

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