POLL-OPEC supply, resurgent shale seen keeping oil prices weak

29 May 2015 | Author: | No comments yet »

OPEC says that its war with shale is far from won.

OPEC is once again at odds with the market. Seeing Saudi Arabia beat its head against the wall has been so fun that now Iraq’s petro-military apparatus has decided it, too, wishes to flood the world’s oil market with fresh supply and bring U.S. shale producers to their knees. In a draft long-term strategy paper obtained by Reuters, OPEC—ahead of its June 5 gathering in Vienna—concludes that its days of misery will last for quite a while longer.

While many market watchers expect OPEC will stick to its decision not to cut output, the meeting will be closely watched for clues about the organization’s next moves. “Anything but a renewed confirmation of the production target at the forthcoming OPEC meeting would be a major surprise as current data shows that OPEC’s strategy is bearing fruit,” said Eugen Weinberg, head of commodity research at Commerzbank. Shale oil, a much hardier enemy than OPEC had once presumed, will keep oil prices relatively low for another two years and perhaps longer, the cartel says. If OPEC is right—and by extension, traders are wrong—look for the pressure to increase on the countries that rely on oil exports to support their government spending. With Brent crude LCON5, +1.36% around $65 a barrel and West Texas Intermediate CLN5, +1.70% at $60, world prices are high enough to make most U.S. production profitable, according to recent analyses by both Rystad Energy and Goldman Sachs.

Domestic crude production rose to 9.57 million barrels a day after several weeks of declines but analysts said the jump could be explained by revisions to the previous data. It’s an emotionless expression that may be rooted in confidence that sooner or later, the West will relent on its financial penalties and the oil price will go back up. And this may be conservative: Oil’s collapse last fall was fueled partly by data from North Dakota’s state government suggesting the average break-even point for Bakken shale is in the low $40s.

The story begins last June, when a surge of US shale oil production began to overshadow various geopolitical crises (in Iraq, Libya, and Nigeria, among others) that conspired to push prices above $115 a barrel. Last week’s Baker Hughes statistics showed only three fewer rigs than the week before, after a 60% one-year drop, with three net new land-based rigs. Then, in a surprising move that startled the market, OPEC, prodded by Saudi Arabia, decided in November not to take its usual course of action and cut production to try to halt the price slide. Meanwhile, most market participants are expecting that OPEC, led by its most influential member Saudi Arabia, will maintain its production target of 30 million barrels of oil a day when it meets in Vienna next Friday.

For all the that the Saudis have “won” because Brent has gained about $10 a barrel since January, it’s still as much as $20 cheaper than it was in November 2014 when the Saudi plan became clear. That decision was widely seen as the first salvo in a battle for market share with the booming U.S. shale industry and other producers. “We believe that OPEC, and the Saudis in particular, will be willing to pursue the path which enables them to maximize their long term position over the medium term,” said Pascal Menges, manager of the Lombard Odier Global Energy Fund, which has $76 million under management. “Therefore we don’t expect any change from OPEC at this stage.” While OPEC’s strategy seems to have worked initially with U.S. oil production growth stalling in recent months and prices rising, some analysts say it’s unclear how sustainable these gains will prove to be.

It was the highest US production in 44 years and, while subject to potential revision, suggested at a minimum that low prices have not curtailed shale. Despite all that, oil prices are rising anyway because hopeful traders latched onto other details in the report—namely that crude oil inventories dropped by an unexpectedly high amount (by 2.8 million barrels rather than the 857,000 barrels forecast by analysts).

Weinberg of Commerzbank said. “The second battle, however, went to the U.S. producers as those cut their costs, streamlined production and the [oil] prices rose again above $60. It’s still to be seen who will win the war.” Nymex reformulated gasoline blendstock for June—the benchmark gasoline contract-rose 1% to $2.0039 a gallon, while ICE gas oil for June changed hands at $579 a metric ton, up $8.25 from Thursday’s settlement. For purposes of clarity, perhaps these analysts should return to OPEC’s strategic rationale, which is not to reduce US inventories, but to stop US shale production in its tracks. It costs only a few dollars a barrel to get the stuff out of the ground, but last year Goldman Sachs estimated Iran’s total break-even cost at $133 per barrel.

But, in a May 22 note to clients, Goldman Sachs noted that only one rig stopped work last week, and that the number of ultra-crucial horizontal rigs—those that make shale drilling work—rose by four. There’s no place on that spectrum where OPEC covers its overhead — and it would have to cut capital spending, making OPEC less competitive and relevant, while making local politics even more volatile and unstable.

So much oil is sloshing around the world that the daily leasing rate for supertankers is up 24% since May 6, to about $65,700 a day, the highest since 2008. A crude-price consensus would spark deal-making, as companies like Exxon Mobil XOM, +0.00% or Chevron CHV, -0.42% snap up rumored targets such as Anadarko Petroleum APC, -0.27% and Chesapeake Energy CHK, -4.81% And $60 crude still spurs U.S. producers to become more efficient, hastening the day when U.S. crude costs $50 or $55 on average to produce.

Pump prices around the national average of $2.77 give people $50 to $100 of incentive a month to buy more-efficient cars — and there’s evidence that prices of many eco-friendly cars are falling. Notwithstanding low prices, even high-cost shale producers will keep pumping oil in order to finance at least part of their operating costs, the report says. A “goldilocks” price for oil is low enough to nurture consumer spending on everything else, and high enough for oil producers and shareholders to make money. Ideally, natural gas also stays cheap enough to sustain pressure for tax incentives for wind and solar electricity that, along with regulation, slash coal use.

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