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How Long Can OPEC Hold Out?

Tyler Durden's picture




 

Submitted by Gaurav Agnihotri via OilPrice.com,

As oil prices are now hovering around $45 per barrel, the entire oil and gas industry is looking forward to the next OPEC meeting, due to be held on December 4 this year in Vienna. On October 14, non- OPEC member Mexico confirmed its participation in a technical meeting organized by the cartel on October 21 in Vienna to which seven other non-OPEC members were also invited.

“We are going with a technical delegation to receive information and exchange it with other producers. But Mexico will not take part in any reduction in production volume,” said Mexico’s Energy Minister Pedro Joaquin Coldwell. The meeting was held last Wednesday and was attended by representatives of five countries: Russia, Brazil, Kazakhstan, Colombia and Mexico. The main agenda of the meeting was to exchange different market views and create a common strategy in response to the current market conditions and low oil prices.

What exactly happened at the meeting?

Venezuela has been the most vocal OPEC member when it comes to the issue of raising oil prices by altering the cartel’s production levels. During the technical meeting between OPEC and non-OPEC members, Venezuela proposed that OPEC must resume its policy adopted in 1980s of fixing the oil price. It suggested a possible ceiling price of $88 per barrel which would naturally require OPEC to reduce its current production levels. In addition, Venezuela also proposed another technical meeting of this kind to be held during the upcoming Dec 4 meeting.

“We are concerned about the depletion of reservoirs and about the decline of production. We are talking here about an equilibrium price to sustain the production,” said Venezuela’s Oil Minister Eulogio del Pino in response to his nation’s stand on the OPEC production levels. Although it was agreed that a similar meeting would be held again after December 4 for assessing the global oil markets, Venezuela’s proposal of reducing the production levels for setting a specific ceiling price was not even discussed.

With Russia and other non–OPEC members refusing to stand by Venezuela, the meeting re-iterated OPEC’s policy of sticking to its production levels instead of reducing them. Although Venezuela has received support from other OPEC members such as Ecuador and Algeria to some extent, the OPEC leaders dismissed any further speculations on production cuts.

With this firm stand, it is possible that we might witness the formation of two blocks within OPEC during the next December 4 meet in Vienna. One, led by Venezuela, Ecuador, Libya and Algeria that would want to reduce production levels and the other led by Saudi Arabia, UAE and Kuwait that would stick to the current strategy of defending market share. Iran may have a neutral stance as, although it ‘urged’ the other OPEC members to reduce their combined production to maintain a ceiling of $70-$80 per barrel, Iran would itself be ramping up its production levels to regain its lost market share, once the western sanctions against it are lifted.

What does this decision mean for the future of OPEC and the oil industry?

“OPEC made it very clear months ago they will not interfere to control prices and it is the market that should do that,” said one of the OPEC delegates during the meeting.

It is quite clear that even Russia (which produced around 10.74 mb/day in September, a new post- Soviet Era record) is not interested in reducing its output and is competing directly with Saudi Arabia in markets like Europe and Asia, battling for market share.

On the one hand, the Saudis are offering discounts to customers in Asia, Europe and the U.S. On the other, Russia is competing hard with Saudi Arabia in Eastern Europe and China.

In any case, a potential OPEC cut in production levels would not be the complete solution to the problem of the global supply glut as the U.S. shale patch has nearly doubled its production, up by 4 million barrels per day between the year 2011 and 2015, arguably making them more responsible for the supply glut and current oil price crash.

Survival of the Fittest

In the end, it will come down to survival of the fittest. Players who have higher breakeven costs will be the ones who will blink first and thereby reduce their production levels. In the present scenario, the U.S. shale drillers, who have very high breakeven costs, are going out of business and we are already witnessing how U.S. production is falling every month since April. Still, oil prices remain below the $50 per barrel mark.

 

FiscalBreakevens

The ‘survival of the fittest’ also applies to Middle East oil producers, and especially to Saudi Arabia, the undisputed leader of OPEC. As widely reported by the media, the International Monetary Fund has warned that Saudi Arabia is now facing the possibility of going broke in the next five years, while the other Middle Eastern nations like the UAE, Kuwait and Qatar have foreign reserves that could last for almost twenty years. The desert kingdom is now facing a massive budget deficit of $36.8 billion according to its 2015 budget figures and is burning its foreign reserves at an alarming pace. Although Saudi Arabia is responding to this crisis by cutting spending, postponing several projects and by attracting foreign investment, is it doing enough to salvage the situation?

Many experts now believe that Saudi Arabia will eventually be compelled to cut its production levels as its rising budget deficit will leave the desert kingdom with no other option. And, with Saudi Arabia deciding to cut the production, we can expect oil prices to bounce back in the longer run. Until then, oil prices will continue to remain bearish and volatile. Although it is almost certain that OPEC will not change its strategy in its next meeting in Vienna, it is unlikely that it would maintain this stance for too much longer in 2016.

 

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Wed, 10/28/2015 - 15:15 | 6722644 ZippyBananaPants
ZippyBananaPants's picture

Kind of like when I was 12 years old and had to poo at a McDonalds.  Some old guy was in the stall reading the paper and smoking a cig, I am 53 now.  Well I asked him if he was going to be done soon and he said no, I considered shitting in the trash can, but eventually the contractions took over and I shit my pants.  

Some things you just always remember!

Wed, 10/28/2015 - 15:15 | 6722646 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

I can no longer blame the FED, that's right you heard me. Now the blame has been moved to the traders and speculators because it's so obvious that the FED is lying and has been for some time - that you have to be complict in the lies to keep this carade going.  If you are trading by thier words you are helping prop up an illegal system and helping liars lie.  I no longer blame the FED. Stocks are now back up to +100 while pm's are crushed. 

Wed, 10/28/2015 - 15:37 | 6722792 SafelyGraze
SafelyGraze's picture

ZippyBananaPants (if that is your Real Name):

a beautiful story, full of the wonder and nostalgia that makes the heart glad.

thank you, sir. or ma'am.

 

Wed, 10/28/2015 - 15:48 | 6722841 Occident Mortal
Occident Mortal's picture

Why would Saudi Arabia cut production?

Surely it would be far more profitable for them to invade Iran.

 

If they invade Iran and lose a subsequent war they will be in the same position as if they just cut production.

If they win the war however they take all the spoils.

 

 

The thing about the oil exporting countries (OPEC) is that all they need to do is put a bullet in one exporting country and all the other members will prosper again. It's like the biggest game of poker ever, if you don't know who the fish is...

Wed, 10/28/2015 - 15:49 | 6722849 Monetas
Monetas's picture

Oh, cut the sarc .... I´m glad he told us his sticky banana pants analdote .... I'm just disappointed in his weak response .... he should have shit on a paper towel and flung it over the stall .... I despise weakness ?

Wed, 10/28/2015 - 16:08 | 6722974 ZippyBananaPants
ZippyBananaPants's picture

I was only 12 or 13 at the time, and back in the early 70's we used to listen to the Carpenters on AM.  Having 40 more years of experience I would have not eaten a big mac and large fries with a Vanilla Shake Chaser.  But, yes I would have put his cig out with the hot lava stream that shot out of my butt.  lol

Wed, 10/28/2015 - 15:16 | 6722654 Femme Fatale
Femme Fatale's picture

The real question is How long can the US Dollar hold out? US Dollar Demise & WW3 >> http://bit.ly/1PyMpdw

Wed, 10/28/2015 - 15:37 | 6722790 MadVladtheconquerer
MadVladtheconquerer's picture

You mean in the face of the 9trill$ USD short that will have to be covered at some point? 

Dollar up nicely against most majors today including the yen to 121.2.

DJTA about to go GREEN.  Bottom is in.

Wed, 10/28/2015 - 15:53 | 6722871 negative rates
negative rates's picture

Hey that was said, love the ending too.

Wed, 10/28/2015 - 15:37 | 6722794 sheikurbootie
sheikurbootie's picture

I don't know what that has to do with the price in tea in China, but that is some funny stuff.  It's amazing what blazes in our memory from childhood.

Wed, 10/28/2015 - 15:15 | 6722649 cheka
cheka's picture

frikkin frackers farking things up for the nyc.opec oil production suppression cartel

Wed, 10/28/2015 - 15:16 | 6722657 Last of the Mid...
Last of the Middle Class's picture

There's a shit pot full of healthy males showing up in Europe that could defend Saud's interests in the middle east.

Wed, 10/28/2015 - 15:17 | 6722662 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

from here to ............................................................................here.

Wed, 10/28/2015 - 15:23 | 6722708 Vlad the Inhaler
Vlad the Inhaler's picture

But what about Iran?

Wed, 10/28/2015 - 15:27 | 6722730 Raymond_K._Hessel
Raymond_K._Hessel's picture

How long can OPEC exist in a world where the FRN is losing power all over the globe, and where nations like Iran and Salafist Arabia are diametrically opposed on just about everything?

OPEC is a relic.

Wed, 10/28/2015 - 15:27 | 6722736 Argenta
Argenta's picture

There is a corollary here that I don't understand, either.  Why do silver miners continue to produce silver when the cost to get it out of the ground is more than what it is selling for?  At least that's the data I see.  Is it simply to generate a revenue stream? Or is it because there are very few primary silver mines operating and most of the silver being produced is a by-product of cheaper metals?

-Argenta

Wed, 10/28/2015 - 15:55 | 6722884 OldPhart
OldPhart's picture

Typically, silver is a by-product of gold mines.

Wed, 10/28/2015 - 16:11 | 6722999 I am a Man I am...
I am a Man I am Forty's picture

Because the price is hedged.  Which sounds good when the price is in the tank but it also caps the upside should silver go to $100/oz.  That's why investing in miners is stupid and why it never does as well as the prescious metal itself.  I follow gold miners more closely but look at the gold miners etf GDX.  Look at the 10 year chart.  Complete shit.

Wed, 10/28/2015 - 16:30 | 6723127 Free_Spirit
Free_Spirit's picture

With Russia and America actually agreed on something, there's hope for the oil price. One bomb on a Saudi oil well and its sky high. Saudi Arabia is looking critically isolated

Wed, 10/28/2015 - 16:55 | 6723279 assistedliving
assistedliving's picture

notice how all those who want a production cut are the same one's that so mis-managed their

wells they cudnt increase production even if they wanted.  

Wed, 10/28/2015 - 17:46 | 6723570 erk
erk's picture

The damage to the US shale industry has been done (rig count), OPEC is just waiting for the corresponding drop in US oil production. When that happens the oil price will rise again.

 

Thu, 10/29/2015 - 00:40 | 6724903 onmail1
onmail1's picture

OPEC boom is gonna bust.

very shortly

 

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