OPEC Has Regained Its Grip On Oil Markets

OPEC

 

Higher oil prices seem to have given OPEC the confidence that it needs to begin thinking about moving forward, and with Russia in the mix as well, it appears as though the alliance will be a force to be reckoned with.

– Gasoline prices averaged $2.92 per gallon for the week ending on May 21, and have surpassed $3 per gallon in regional markets.

– The prices are the highest for the Memorial Day weekend in four years.

– However, prices are likely to fall back soon with crude oil prices plunging over the past week.

…Oil prices have fallen more than 6 percent since Thursday on news that OPEC could increase production. The next steps, however, are unclear. Is a deeper price correction in order? Or has the steam been let out of the market, pushing prices down to sustainable levels? Obviously, OPEC and Russia hold all the cards for the next few weeks.

OPEC decision demonstrates its clout. Despite all the ink spilled on the primacy of U.S. shale, the fact that oil prices crashed after news surfaced that OPEC and Russia are discussing adding some supply back onto the market demonstrates the cartel’s ongoing influence over global oil markets. U.S. shale is adding enormous new volumes of supply, but shale companies have nowhere near the power that OPEC has to force sudden and sharp price changes on the market. Oil prices fell more than 6 percent over two days since the news broke that OPEC and Russia could add as much as 800,000 bpd back onto the market in the second half of this year.

Saudi-Russian deal not done yet. While Saudi Arabia and Russia have reportedly agreed to increase production, even as they continue to negotiate over the specifics, reports suggest that there isn’t agreement from the rest of the OPEC/non-OPEC to go along. In fact, several producers are opposed to adding some production back into the market. “It might be a contentious meeting,” Ed Morse, head of commodities research at Citigroup Inc., told Bloomberg. Some opposition is not surprising since higher production levels would presumably come from Saudi Arabia and Russia, at the expense of other countries who are already producing as much as they possibly can.

Russia and China filling void in Iran. Russian and Chinese state-owned companies are expected to take business opportunities in Iran after European companies pack up and leave. China’s Sinopec is moving to complete a $3 billion deal to develop a section of the Yadavaran gas field that Royal Dutch Shell (NYSE: RDS.A) had hoped to secure. CNPC could take an additional $1 billion stake in the South Pars gas field from its partner Total (NYSE: TOT) if the French oil giant exits the country. A series of Russian companies have also completed deals in Iran.

Canada to buy Kinder Morgan pipeline. The Canadian government is expected to announce a decision on Tuesday to purchase Kinder Morgan’s (NYSE: KMI) Trans Mountain Expansion project. A growing number of analysts had expected the pipeline company to scrap the project after concluding the political risk to the project was insurmountable. The Canadian government has worked overtime to try to keep the project alive, and had first offered to indemnify the project to reduce risk, but Kinder Morgan has not been convinced to move forward. Reports suggest the government, in a desperate bid to push the project forward, will purchase it outright for about C$4.5 billion. Then, after the government can ensure the project moves forward, it would sell it off again to a private company.

Halliburton wants to bring shale revolution to Saudi Arabia. Halliburton (NYSE: HAL) and Saudi Aramco reached a deal reached a three-year deal to boost natural gas production in Saudi Arabia. Aramco wants to increase gas production to cut down on oil consumption used in electricity generation.

Permian gas glut threatens to swamp oil production. A bottleneck for natural gas could force Permian drillers to shut down or curtail oil production. Some flaring is allowed, but state regulations prohibit it beyond a certain point. “If I don’t have pipeline capacity and I can’t flare it, the only option is to shut in the well,” Texas Railroad Commissioner Ryan Sitton said in an interview with S&P Global Platts. “And now I’m going to shut down oil production because I don’t have anything to do with my gas. That is a realistic scenario that could happen.” Citibank said last week that the natural gas glut could push natural gas prices “even to zero and curtail oil and gas production.” Sitton says that the issue will start to become a bigger problem towards the end of this year.

India to ignore U.S. sanctions on Iran. India, one of the largest buyers of Iranian oil, will not comply with U.S. sanctions on Iran. “India will comply with UN sanctions and not any country-specific sanctions,” foreign minister Sushma Swaraj said on Monday.

Full article: OPEC Has Regained Its Grip On Oil Markets (OilPrice)

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