A general view of the OPEC building and logo in Vienna (Reuters/Leonhard Foeger)
Economy
Economic effects of Fracking, Opec and the Oil Wars
from RT: Oil Wars: OPEC sets crosshairs on US fracking
The group of major oil exporters – known as OPEC is set to converge on Vienna in a few days. And it’s already set crude producers across the globe on edge. RT’s Murad Gazdiev has more.
from Oil Price.com: Saudis Believe They are Winning The Oil Price War
It’s almost a foregone conclusion that OPEC won’t cut its production levels at its June 5 meeting in Vienna. Anyone needing strong evidence, if not proof, of this need only listen to Ali al-Naimi, the architect of the cartel’s effort to reclaim market share.
In fact, some observers say OPEC not only won’t cut overall production levels from 30 million barrels a day to shore up prices, but may even increase them.
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It’s important to remember that shoring up oil prices is not the highest priority on al-Naimi’s list right now. While some OPEC members may have trouble making ends meet, wealthier Gulf Arab states can withstand lower revenues. This is especially true for Saudi Arabia, which has currency reserves of nearly $750 billion.
Instead, the strategy was a price war against non-OPEC members who were ramping up production, particularly those in the United States exploiting the boom in shale oil. The question, posed to the Saudi minister when he arrived June 1 in Vienna in advance of the cartel’s meeting, was whether that strategy was working.
“The answer is yes,” al-Naimi replied. “Demand is picking up, supply is slowing.”
This isn’t just wishful thinking. OPEC is, in fact, gradually reclaiming its market share, according to a June 2 report from Barclays. It said that the cartel captured an average market share of 33 percent in April, up by 1 percentage point from the same month last year, but still 35 percent below the share it controlled in the middle of 2012. Part of this recent growth is attributable to increased sales to China.
The comment by the Saudi oil minister can only be interpreted as a sign that a production cut isn’t going to happen, according to Gareth Lewis-Davies, an energy strategist at the Paris-based financial services company BNP Paribas.
Related: How Long Can OPEC Maintain Its Current Strategy?
“[Al-Naimi] said that Saudi strategy is working, which suggests that they therefore would like to continue with that policy,” Lewis-Davies told Bloomberg on June 2. “They’re playing a longer game that requires prices to remain at or around current levels for longer.”
The reason is that many oil companies, particularly those who extract oil from shale, have higher production costs, primarily because of complex and expensive fracking, and a long stretch of lower fuel prices could cut deeply into their profits.
In fact some observers believe OPEC, under al-Naimi’s influence, may intensify its strategy. One, Olivier Jakob, an energy analyst at Petromatrix, said the cartel mightraise its output cap to 30.5 million barrels a day, reflecting today’s actual production levels.
This makes sense to the consultancy JBC Energy in Vienna. It concludes that if every OPEC member is producing as much oil as it can, it would send a powerful message to non-OPEC members, especially producers of shale oil. It also said the move would “put the organization back into the driving seat, following some commentators’ doubts of its relevance after the last meeting” on Nov. 27.
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Al-Naimi’s comments, combined with a slight drop in the value of the U.S. dollar, caused the price of Brent and West Texas Intermediate crude to inch up. The price of both types of oil crashed in the second half of 2014 because of the energy glut. Now the Saudi plan to reclaim market share has cut into U.S. oil production, with a 60 percent decline in drilling rigs.
So al-Naimi’s assessment of his strategy seems to be correct: the approach is working, and it would be beneficial for OPEC if the strategy weren’t abandoned at the organization’s June 5 meeting.
By Andy Tully Of Oilprice.com
from RT : ‘Saudis protect market share through low prices’
Saudi Arabia is interested in low oil prices because it wants to be in a competitive position when prices rebound, Ed Hirs, from independent oil and gas company Hillhouse Resources, told RT.
Ministers from OPEC, the cartel of major oil exporting countries, are converging on Vienna. It is expected that during their key meeting Friday the organization will decide to keep a group output target of 30 million barrels per day. At their last gathering in the fall of 2014, OPEC decided not to limit production, sending already sliding oil prices into a further free fall. The price hit a near six-year-low and hasn’t fully recovered since.
RT:How much are the shale drillers affected by low oil prices?
Ed Hirs: The shale industry has really been hammered: 125,000 workers directly in oil and gas in the US have lost their jobs. More than half the number of rigs we had working this time of last year are now offline, and we’re seeing production begin to drop in the three major oil shale places across the US. The low prices have impacted the business.
RT: Do you think that was the objective of OPEC, in particularly Saudi Arabia, all along – to drive out the fracking industry?
EH: I don’t think it was the objective. What we had last year was that demand just didn’t grow as fast as supply did. The Saudis and OPEC have increased production since December with the idea that they would force the correction here that will happen a little faster than it would just normally through the course of events. Demand is increasing in the US for crude demands, and increasing in Africa and in Asia; it is just not increasing as rapidly as the supply came online last year.
RT: By continuing this sort of policy of trying to maintain a low oil price, aren’t the Saudis, who are the main oil producers, shooting themselves in the foot?
EH: I wouldn’t say they are shooting themselves in the foot. They are protecting their market share, prices will increase over time. They are making sure that when the prices do come back that they are in a very competitive position. In any kind of industry, you want to be the low-cost producer; that gives you most profits going forward. The Saudis and OPEC are the low-cost producers in crude oil across the world. They are in a much better competitive position than any of the shale players in the US.
RT: What do you expect from the upcoming OPEC meeting?
EH: I expect more of the same. I don’t expect a change in policy. I think that is what we’ve been seeing in the press and the reports coming out of the interviews that have been given up till the meetings. I don’t think there will be a change in policy. This is pretty much what we expected in November last meeting – that OPEC is going to let the market settle out with the lower price and wait for demand to catch up with supply.
RT: Have they reached the base for oil, or is it going to drop further?
EH: We may see its drop a little more. I don’t think a price in the 40s is out of the question, but that won’t last for much longer. Again, we’re seeing production in the US drop off, and that will continue throughout the year, especially with prices just in the $60 region.
