OPEC To Take Drastic Action Despite Shale Slowdown

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

WTI recently dipped below $50 per barrel for the first time in a month, erasing the strong September rally. It’s no coincidence that after two weeks of price declines, OPEC has tried to talk up the oil market again, hinting that more drastic action could be forthcoming.

Echoing the world’s top central bankers, OPEC’s Secretary General said that the oil cartel might need to take “extraordinary” measures to balance the oil market next year. “There is a growing consensus that, number one, the re-balancing process is underway,” OPEC’s Mohammad Barkindo told reporters on Sunday in New Delhi. “Number two, to sustain this into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward.”

As always, OPEC is vague on the specifics, but the working assumption is that the group will agree to an extension of the cuts until at least mid-2018, or perhaps even as late as through the end of the year. There’s been some discussion about deeper production cuts, but there aren’t a ton of analysts who see OPEC going that far, despite Barkindo’s cryptic language.

Meanwhile, Saudi Arabia engaged in a bit of its own psy-ops with the oil market on Monday, saying that it was taking “unprecedented” steps to cut its oil exports. Saudi Aramco said it would lower exports by 560,000 bpd next month, “the deepest customer allocation cuts in its history.”

The comments are consistent with the country’s longstanding pattern of trying to jawbone the market when it wants higher prices. Based on Monday’s activity, the effort didn’t work.

“The fact that we did not get any significant strength from the Saudi news is rather disheartening for the bulls,” Stephen Schork, an analyst and author of the Schork Report, told the WSJ. “The market is very skeptical of this.”

Of course, real cuts to oil exports will be felt if they are carried out, but after a few years of getting jerked around by every utterance from OPEC, the markets want to see proof in the pudding. Aggressive rhetoric no longer moves the market the way it did a year ago, so we’ll have to just wait and see what OPEC does at its November meeting.

“With rising production levels and no definitive word from OPEC and the Russians that they are going to extend the cut or deepen it, the rally seems to have lost its momentum,” Gene McGillian, a market research manager at Tradition Energy, said in a Bloomberg interview.

That reaction seemed to be widespread on Monday. “I think that without the support of products and Brent, the market may get dragged lower in the near term as it’s apparent that the market doesn’t care much about OPEC already jawboning about an extension of the deal,” Scott Shelton, a broker at ICAP, told Reuters.

The ironic thing is that while OPEC ponders more drastic action, there are signs that U.S. shale is actually not doing as well as everyone thought it would be at this point. Production is up, but signs of strain are showing. The rig count fell last week, after weeks of unimpressive gains. The slowdown suggests the industry is becoming more cautious, particularly with oil prices running out of steam.

In fact, some cracks are becoming visible in the Permian basin, often cited as the most attractive shale basin in the U.S. Costs are on the rise and some drillers are running into production problems. Production is up, but profits are scarce.

That could lead to a wholesale rethink for the industry - the days of explosive growth in the shale patch could be coming to an end. A growing number of investors are demanding that E&Ps slow down and focus on profitability, which will likely come at the expense of the industry’s blistering growth rate.

OPEC has yet to enjoy the fruit of this potential receding tide of shale drilling - oil looks softer than it did a few weeks ago and hedge funds and other money managers have pared back their bullish bets lately, a harbinger of more cautious sentiment.  

But while OPEC is nervous about near-term oil prices, and is planning “extraordinary measures,” they can at least take comfort in the fact that the shale bonanza is moderating.

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venturen's picture

Saudi cut...and others fill....Oil is going down....fracking is taking over the world!

RagaMuffin's picture

Saudi plan B: sink a tanker in the Starits of Hormuz even if it is one of their own?

CRM114's picture

Well, they'd be aiming at somebody else's, but...


"Whatever I hit, I call it the target!"

bankbob's picture

I think it is more likely that Putin would sink that tanker.  He has as much to gain as anyone.

RoBERTAZ's picture

Good article. The analysts from Shepwave have beenn calling oil action precision.  They are expecting a big move in equities proably by thursday or friday this week.  They said this yesterday so let's see.  Their calls have been dead on for short term tradres.

RoBERTAZ's picture

Good article. The analysts from Shepwave have beenn calling oil action precision.  They are expecting a big move in equities proably by thursday or friday this week.  They said this yesterday so let's see.  Their calls have been dead on for short term tradres.

CRM114's picture

Ragheads are going down faster than a ho when the Fleet's in.

KimAsa's picture

Oh bullshit. Rebalancing my ass. The KSA can't afford to cut production one iota and they won't until Ghawar takes its final puke and rolls over. The KSA is on the same endless production treadmill as everyone else. Nobody cares about providing the world with an energy source, it's all about their golden toilet seats and whatever other sick and twisted indulgences they enjoy. It's all coming to a screeching halt.

The world economy cannot handle anything above $70bpd, maybe even $60, yet oil producers have leveraged their product well above that figure. They're stuck, and it's going to be fun watching them flail in the hot desert sun.

SirBarksAlot's picture

And this, ladies and gentlemen, is "Step 3" on the road to hyper-inflation.


LiluDallasMultipass's picture

the reason why it didnt work "based on mondays activity" is because of a national holiday, it was trying to go up all day and tuesday finally materialised, some of the stuff on here is uninspiring

LiluDallasMultipass's picture

its actually quite funny hearing these professionals talk about the market they clearly have no connection with.. literally every other analyst says these definite statements about what "the bulls" are doing, the oil market doesnt work like a clock, its inefficient, when the big fund managers are away on holiday, im guessing there just aint enough steam to get the train going, i had fun buying it all monday and tuesday anyway