The Rest of the Story | Russell T. Rudy Energy LLC
The recent run up in oil prices has been cheered from Midland to Kuala Lumpur. Domestic oil and gas operators, especially those with large shale positions, hedged production and revived plans for new projects. However, “Oil Voice” recently carried an article by Alahdal Hussein in which the author presented his view regarding the OPEC production freeze which led to the price run-up, and its real world implications. The article is entitled “Three Things You Should Know About OPEC’s Oil Deal”.
The objective is to stabilize prices, rather than increase them. The Saudis and OPEC reap the rewards of a price increase to $50 per barrel, but their real objective is to establish a floor at $40, beneath which oil will not fall. However, they also realize that at $60, U. S. shale operators will increase the rig count and production, thereby sending more oil into the global market. With OPEC output capped at 32.5 to 33 million barrels per day, this would threaten OPEC’s market share, and concurrently exert downward pressure on prices.
Actually consummating and implementing an oil freeze would be an admission of defeat. If an agreement is in place, prices would rapidly approach $60. This would mean that OPEC had endured two years of self-inflicted hardship in vain. Compromised market share, due to incremental shale production, would not be acceptable. Further, this would likely stimulate investment in shale, and further compromise OPEC’s long term market influence.
A freeze would put shale operators in charge of pricing. With oil prices at $60 and OPEC production levels frozen, shale operators would then be able to increase or decrease production and drive prices. While collusion between U. S. shale operators would be illegal, unlikely, and virtually impossible, economic forces could certainly drive them to inadvertently act in unison. OPEC would find this unacceptable.
Given all of this, what is OPEC to do? They want stable, higher prices, but not a great deal higher. They also want to preserve market share and pricing power. Hussein feels that this can be achieved by playing what he calls “OPEC’s emotion game”. Hopes and prices can be raised by talk, and some progress, toward a production freeze agreement. We have already seen this with the increase to $50. However, to prevent prices from passing the $60 threshold, OPEC can stall, equivocate, and play the media with rumors of discord.
Hussein concludes, “But at the end of every round of this game, no action is taken. We are now in ‘round 3’ of OPEC’s emotion game, and when November comes, you will all see that no action is taken and prices are kept around $50/bbl.”
To read the article in its entirety, please go to http://www.oilvoice.com/n/Three-Things-You-Should-Know-About-OPECs-Oil-Deal/6babfc7cfd1b.aspx .
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