I looked upon last week’s heart stopping announcement of an agreement between Russia and Saudi Arabia to freeze crude oil production with the same lack of enthusiasm I hold for the All Star game – to me, they are meaningless showpieces where who wins and what the score was is forgotten by the time you take your next trip to the fridge! One thing that “the announcement” and the All Star game have in common is that they are team sports – but the freeze proclamation put forward was done by a team noticeably lacking in willing players.
OPEC is made up of 12 members, but the proposed freeze has been sort of agreed to by only three of them: Saudi Arabia, Venezuela, and Qatar with Russia (an OPEC wannabe, throwing in an “us too” for good measure.) If you ask me, this is like herding cats, the only thing is you need a bunch of them to herd! If this is a serious proposal or position paper, then where are the other key team players, namely, the U.S., Iran, Iraq, Canada, and China?
Answer: They weren’t invited to the game.
In truth, this is a blatant attempt to manipulate an upward price movement of crude oil. I believe there may be a misconception that this freeze is about price, but it isn’t. This is a freeze on production to hold at January levels. But there’s the first problem because the January crude oil production levels were the highest in history, so this implies an entrenchment of oversupply not a reduction of the glut, which currently is 1.0 million bpd in excess of demand.
As if this deal was not already dead in the water, it gets deader when you consider that Iran is not all warm and fuzzy on the whole idea, which was incubated by their arch rival/enemy – the Saudis. In fact, now that Iran’s sanctions have been lifted, they appear to have every intention of claiming back their pre-sanction market share, which means adding another 1 million bpd to the crude oil glutosphere.
So if Iran agrees to a freeze, it would, for all intents and purposes, be a self-imposed sanction of their own production. In my view – and that of many of my colleagues in the follow-the-bouncing-barrel-business – this is a message to non-OPEC producers in general, and those in the U.S. Shale oil business in particular, who are saying, “Look guys, you’re hurting at $30/bbl and we aren’t very happy either. We are willing to freeze production to ‘stabilize’ prices. Are you in or out?”
After some 30 years of our screaming at OPEC as the price-fixing collusionists that they are, we are now offered the opportunity to join their team! Now that’s ironic, if not insulting.
What OPEC refuses to admit is that they aren’t in control of crude prices anymore. U.S. shale oil producers now call the shots. The industry has turned out to be a much more pugnacious and technically adept opponent than the Saudis realized when they started this market share war in November 2014.
The way OPEC should be handling the glut/price problem is to cut production and take baby steps say, 3% to 5% every two months, until they see the price at which U.S. shale oil comes back into play, and that will be the endpoint or market price of OPEC crude.
The rules of the game have changed.
U.S. Shale oil is the metaphoric referee.
Players take note or you’re out of the game.