OPEC prays prices might rise – from the dead
15 November 2016
Ministers from the Organization of the Petroleum Exporting Countries (OPEC) deliberated for 11 hours on Friday trying to reach consensus on a proposed production cut.
Brent Crude prices fell below $50 a barrel on word that two of its members, Iran and Iraq, have refused.
It used to be easy for OPEC. Word of a production cut – and the market would see dependable rise in price. But it’s been eight years since there actually was a production cut with a lot of talk along the way.
Mitch Kahn president of MEK trading said, “It won’t work now. OPEC is squeezed for cash.”
Will they or won’t they?
Kahn doesn’t think OPEC will agree to the cuts because “they don’t want to lose market share to Iran, Libya, and Nigeria. Iran is now back on the market producing 3.6 million bpd (barrels per day) – they have roughly another 500,000 a day capacity. They aren’t agreeing to any quota. They need money. They all do.”
Even OPEC’s largest competitors are campaigning for a cut.
Russia has sent its Energy Minister Alexander Novak from Vienna to Venezuela to meet with different members of OPEC this week. He said at a press conference on Monday, “In the current conditions, a freeze or even a cut in production for a certain time period is the right decision for global energy. ”
Analysts Bassam Fattouh and Amrita Sen from the Oxford Institute for Energy Studies believe the cut is crucial. “There is a realization within OPEC that failure to reach any sort of agreement in November will be very bearish for the oil market with the potential to erase all recent price gains.”
Competition from new technology
Mitch Kahn says OPEC has been backed into a corner by new competition, “technology is improving with oil sands extraction. It’s getting cheaper to [get] it.”
Fracking for shale oil in the US has seen steady growth and oil sand extraction has put Canada on the map as a new major producer.
According to Canada’s National Energy Board the country has the world’s third-largest crude reserve after Saudi Arabia and Venezuela, with capacity to produce 5.7 million bpd by 2040.
Chapman engineering firm in Alberta Canada did a report on sand oil extraction for oil company MCW Energy and claims its new methods reduce the cost of processing by half.
According to a study done by the Wall Street Journal, it only costs $5.85 to produce a barrel of shale oil.
OPEC’s main producer is feeling the pressure of low oil prices. Saudi Arabia has just held a $17.5bn bond sale, cancelled bonuses for its government workers and according to the IMF, their overall gross domestic product will see its lowest growth level in seven years.
Not going far enough?
When OPEC agreed in late September to set a production limit of 32.5-33 million barrels per day (bpd), Brent rose above $50.00 a barrel for the first time in months.
But a production cut might be enough to ignite demand in a market awash with Crude.
OPEC’s October report says the total amount of Crude produced per day in the world is 96.4 bdp. That’s 2 million more bpd than the world needs.
There is so much crude it’s going into floating storage receptacles and according to the US Energy Information Association, floating storage has reached its highest level since 2009.
On November 30th, OPEC will hold a final meeting to announce whether or not there will be cuts and how much each country will be responsible for cutting.
**Oil Trader quotes from interview conducted by me. Mitch Kahn was one of the first traders to buy and sell the WTI contract when it first appeared on the NYMEX in 1981. He has been a local trader- using his own money- for almost 40 years now.