As Quota Compliance Tumbles, Is The End Of OPEC Near?

Tyler Durden's picture

OPEC’s progress in reducing the oversupply in global oil markets relied on contributions from Nigeria and Libya in March, two countries that are exempt from the group’s deal to rein in production.

The Organization of Petroleum Exporting Countries pumped 32.095 million barrels a day, down 200,000 a day from February, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data. Supply from Nigeria and Libya dropped by a combined 210,000 barrels a day to 1.55 million and 620,000 a day, respectively.

Among the 10 members bound by production caps, compliance weakened to 89 percent of pledged reductions from 104 percent, the survey showed. As well as the two African countries, Saudi Arabia buoyed the group’s effort by cutting its own output by more than it agreed late last year.

Which raises the question, as Rakesh Upadhyay of asks, is this the end of OPEC?

OPEC, which has far exceeded the average life of cartels, is on the brink of failure. Though cracks have been developing in the cartel since the start of the current oil crisis, the group has managed to stay together so far. Nevertheless, the success of the current OPEC deal for production cuts will decide its future as a cartel.

What is a cartel?

A cartel is a group of like-minded producers, who act in concert—or collusion—to achieve a shared goal of increasing their profits by means of restricting supply, fixing prices, or destroying their competition by illegal means. The average life of the 20th Century cartels has been 3.7 to 7.5 years, according to various studies by Margaret Levenstein and Valerie Suslow. In the past two centuries, cartels have been able to influence prices by an average of 25 percent.

History of OPEC’s success in boosting oil prices

Since its inception, OPEC has been fairly successful in boosting prices by various means. A few of the price increases, however, were due to reasons other than direct OPEC action, nevertheless benefitting their members.

Though the 1973 oil embargo was brought on by political reasons, OPEC used the production cuts of the embargo to boost oil prices from $3 a barrel in 1973 to $12 a barrel in 1974.

The 1979 energy crisis was not a brainchild of OPEC. The production dropped due to the Iran-Iraq war, and the price of oil doubled in about 12 months, again benefitting OPEC members.

OPEC was able to boost prices using production quotas and production cuts following the Asian Financial Crisis in 1997.

What has OPEC done to support oil prices in the current oil crisis?

OPEC, as any cartel would, has used two strategies to influence oil prices. However, both have been unsuccessful in achieving their objectives.

In 2014, Saudi Arabia, the de facto leader of OPEC, attempted to stifle the competition of the shale oil drillers by keeping their production intact. As a result, oil prices plummeted to multi-year lows of about $27 a barrel in February 2016. The drop in oil prices saw 119 North American oil and gas producers file for bankruptcy from the beginning of 2015, according to Haynes and Boone, LLP.

U.S. oil production dropped about 883,000 barrels a day by August 2016, after topping out at 9.7 million barrels a day in April 2015. Nevertheless, the price decrease went well below OPEC’s expectations. Meanwhile, many shale oil drillers used a combination of better technology and hedging to continue pumping oil, despite the low prices.

As its first strategy failed to effect the U.S. shale oil production to the extent presumed, OPEC then adopted a second strategy of cutting production. On November 30, OPEC sealed a deal to cut production after months of difficult negotiation. Though prices bounced and broke out of the $52 levels – a strong resistance – they could not reach the $60 levels preferred by OPEC members.

However, this modest rally in crude oil prices rejuvenated the U.S. shale oil drillers, and U.S. oil production is now on the rise. As a result, crude oil has dipped again and is hovering near the $50 per barrel level.

The market believes that if crude oil prices remain above $50 per barrel, U.S. shale oil production will increase. For this reason, OPEC is finding itself in a catch-22 situation: It is losing market share to the U.S. shale oil drillers, but it is unable to propel prices considerably higher. It is losing its ability to influence prices above a certain level. Related: What Gold Can Tell You About Oil Prices

What happens if the Cartel fails in its objective

A cartel is able to hold its members only when it fulfills their objective of higher prices, which has not been the case with OPEC. The member nations will now look to fulfill their objective by cheating and acting individually, according to their requirement.

Saudi Arabia, which was the leader of OPEC and the price setter of the world, is losing its clout in OPEC. Even in the current round of production cuts, most of the work is being done by Saudi Arabia, whereas the other members are shying away from their designated quotas.

OPEC has far outlived the average lifespan of a cartel, but if the OPEC members don’t regroup and act together, chances are that the cartel will come to an end very soon.

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Bill of Rights's picture

We can only hope..America has always been energy independent, we've just been lied to...

Ghost of PartysOver's picture

OPEC is at the mercy of Russia and the US Shale plays.  Anything OPEC tries will not be successful unless Russia and US go along.  OIL $35 - $55 for the foreseeable future.

Theta_Burn's picture

With opulent Saudi princes rolling in for a visit with the 1000 man entourage and golden shitter, they will continue to lie..

Secret Weapon's picture

Here in houston - diesel fuel $1.96 per gallon.  Die OPEC die!

A. Boaty's picture

Totally predictable failure as it will take years to work thru 1 billion bbl in storage.

otschelnik's picture

They're big internal problems: 1) Iraq, which wants to get back to pre-Saddam production level of 5 million barrels/day, and Iran which wants to get back to pre-sanction production of 5 million barrels/day.    

Nahh OPEC will stick around.  Just worth going to Vienna twice a year and renting the penthouse suites at all the 5-star hotels, booze and babes.... 

Soul Glow's picture

OPEC has always been a front to peddle false information and lies by the Middle East oil producing nation-states.

cheka's picture

opec is outpost of nyc

GunnerySgtHartman's picture


coast1's picture

opec, who cares....stop spraying the skies with chemicals!!!!    Trump knows about this, here is a link to it being addressed at the United Nations for goodness sake....

If Trump does not stop the chemtrails in the very near future, it will prove he is a jew slut.

People are all concerned about stock market, or opec, or other bullshit I see on so many articles on ZH, but they dont care that they are breathing in poison everyday. or that chemtrails are harming agriculture (the food we need to survive etc).....I am sure tyler does not read all comments, but if this passes by ya Tyler, man up and tell the truth how we are all being killed.  Chemtrails. 

silverer's picture

Yes, the chem trails really are an issue. There is too much actual documentation to ignore and real things about it on the congressional record.

VangelV's picture

We need to keep all this in perspective.  OPEC's charter was a slightly modified document that was copied from the charter of the Texas Railroad Commission.  The TRC only mattered until there was surplus economic production available at the prevailing market price.  Whether OPEC exists or not is irrelevant at $40 because OPEC, Russia, Canada, or the United States cannot produce enough barrels to meet demand at that price and still turn a profit.  

The simple fact is that whether we like it or not, sustainable conventional oil production has already peaked.  This does not mean that some ruling group in Saudi Arabia or Russia cannot push the producing fields and sell at an economic loss if sales continue to generate cash flows that can be moved to offshore bank accounts or to purchase real assets abroad.  It does not mean that the US shale sector cannot keep borrowing to produce oil from operations that will NEVER generate a positive cash flow.  

The information above is helpful for speculators who don't care about what happens tomorrow or next week because they may be nimble enough to make a paper profit no matter what happens.  But it is irrelevant to the greater picture that has yet to come into focus for most people.  The simple fact is that the data is telling us that the Bakken has already peaked.  In September 2014, 8,500 wells produced 132 per day.  The latest data, which is for January 2017 shows 10,880 producing 86 barrels per day.  That means that the drilling of more than 2,300 wells at a cost of approximately $16 billion, was not sufficient to get the production level anywhere near the historical high.  

No matter how we approach this problem, the math does not seem to work.  If oil prices fall below $40 they will be driven there by a collapse in demand, not some new revolution that is promised by the promoters on Wall Street.   If I were a large producer, I would stop pushing field production and look to conserve reserves that will generate far more value once the picture comes into focus.



Ink Pusher's picture

The Russians,Saudis and Chinese have teamed up. It's a done backdoor deal.

Next event will be the S&P downgrading the USA shortly.

The Collective of Myopic Fossils continue down the path of delusion and false hope.

Rig counts rise as price drops and nobody wants to or can be truthful about their actual output.


silverer's picture

Their main concern is that they can keep having expensive meetings in expensive hotels, stay in expensive rooms and continue to order expensive food and room service, and maybe some hookers. Some people have a real job that accomplishes something. Imagine an operator of a huge earth moving machine that shows up for work everyday and just talks about what he's going to do. But he never starts the machine. Goes home, comes back, and just repeats the same thing every day. Meetings are generally bullshit, but unproductive meetings squander any chance of real productivity, and simply adds to the drain on any real productivity that has to pay for those stupid meetings.

In.Sip.ient's picture

Interesting comment from a former OPEC bureaucrat.

Guy was a "refugee" from same so he talks.


Seems every OPEC meeting, there is a pre-approved

"declaration" that comes from "somewhere" that is not the

people or countries represented at the table...


Think about it... don't blow a gasket...


Sapere aude's picture

Another dreamland story from the stables of ZH.

Shale is losing billions of dollars, shale companies either going bust or looking to tap up more finance from any source they can, just as NIRP and ZIRP fail, a recipe for disaster.

Shale has the impossibility of raising production, and the absolute certainty of very very early depletion of whole fields, and don't take my word for it, look at the reports below.

OPEC can afford not to cut at all, as there is no glut, only declining reserves and the certainty of massively falling production when contrary to what some might want to believe, demand is still rising. Perhaps not in the developed world, but that's normal as manufacturing leaves developed world off to cheaper undeveloped world taking the extra energy requirement with it.

Even this so called glut is fictional, the massive inventories are A REQUIREMENT in most countries INCLUDING THE USA.

In the European Union, according to Council Directive 68/414/EEC of 20 December 1968, all 28 member states are required to have a strategic petroleum reserve within the territory of the E.U. equal to at least 90 days of average domestic consumption.

So its absolute propaganda when articles mentioning glut in inventories, when the inventory requirement HAS TO RISE in the case of the EU by law. Other countries have similar arrangements, with most having Global Strategic Petroleum Reserves, including the USA.

CHINA 475,900,000bbls INDIA 37,400,000bbls (rising) KUWAIT 37,400,000bbls (rising) LOADS MORE IF YOU WANT TO LOOK AND SEE THE TRUTH RATHER THAN THE FICTION JAPAN  As of 2010, Japan had State-controlled reserves of petroleum at 11 different locations totaling 324,000,000 barrels (51,500,000 m3) RUSSIA 14,665,982 barrels SOUTH AFRICA 45,000,000 barrels SOUTH KOREA 286,000,000bbls (rising)

Flying Wombat's picture

What will ultiamtely kill OPEC is the geopolitical rift between Iran and Saudi Arabia combined with US shale output pressurizing the marginal efficacy of the talking shop that OPEC largely has become.

Sapere aude's picture

FAKE NEWS AGAIN. Shale is not pressurizing anyone. Do you not research anything or do you just take it as true the garbage you are fed.

Shale is a ponzi scheme that cannot keep production to anywhere near the required levels to pressure anyone.

Do you know what the average lift cost is of Middle Eastern Oil.....$7

Do you know what is for shale, leaving out all the hyperbolae...its around $40-70

But then they talk about the social cost for Saudi oil, but then don't mention the social cost of shale. Social cost means nothing its what it costs to produce and if the Middle Eastern countries wanted to they could cut the price of oil to $15 and wipe shale off the planet...

They don't because they do not have to, because Red Queen Syndrome ensures that happens anyway