OPEC Cartel On The Verge Of Collapse

The last time OPEC splintered, and the Saudi energy minister demonstrated that when it comes to the "cartel", the only opinion that matters was that of, well, Saudi Arabia, was on November 27, 2014, when in the infamous "OPEC Thanksgiving Massacre", OPEC effectively broke up after Saudi Arabia decided it could put shale out of business by sending the price of oil so lower, it would cause mass shale defaults and regain market share.

The result was two-fold: oil prices crashed (both immediately as shown below) and over the longer-term, while the Saudi strategy proved to be an epic disaster as it woefully miscalculated that shale's breakeven price was far lower than the Saudi advisors (Goldman and Citi, as well as a handful of hedge funds) had estimated.

As a result, two years later, OPEC reconstituted itself when in late 2016, it agreed to cut output by 1.5mmb/d.

That strategy worked better, as the price of Brent rose from $30 to as high as $80 over the next 18 month, in fact rising too far, as first concerns about demand destruction emerged, followed by Trump directly attacking OPEC (and by implication his close "friends" in Riyadh) on Twitter, demanding lower oil prices (and thus more oil production) or else risk watching his entire fiscal stimulus crash and burn as a result of soaring gas prices.

We bring this bit of not so ancient history because tomorrow OPEC may break apart again, for the simple reason that Iran, OPEC's third largest producer, finds itself in a lose-lose situation, in which it either agrees with a production boost, thereby effectively greenlighting US sanctions against itself and allows Saudi Arabia to take over much of its market share, or defies Saudi Arabia, and along with Venezuela, causes OPEC to splinter again.

Sure enough, with just hours to go until tomorrow's meeting, Iran has continued to reject any increase in OPEC oil production, potentially dooming any effort by Saudi Arabia and Russia to get a consensus decision tomorrow.

According to Bloomberg, during today's Vienna talk, ministers from some of the world’s largest oil producers failed to secure the sought-after compromise that would allow the cartel to ease back on its production cuts.

And here is where it gets interesting: while Iran alone can veto any change to the group’s output policy, there is historical precedent for the Saudis to act alone and increase supply when they see an urgent need. And even though Saudi Arabia also finds itself between a rock (the Aramco IPO which desperately needs even higher oil prices) and a hard case (President Trump who demands higher oil prices), Crown Prince MbS will have no choice but to yield to the latter, and overrule the Iran veto, concluding the process in which Trump effectively splinters OPEC.

Sensing what is about to happen, Iran - which again has virtually no upside tomorrow no matter what the OPEC decision is - was not happy:

"It wasn’t a good meeting. It was just ceremonial statements" Iran’s Oil Minister Bijan Namdar Zanganeh told reporters after walking out of the meeting of the Joint Ministerial Monitoring Committee. "There were proposals but I don’t think we can reach an agreement."

Well, an agreement can be reached. It just won't include Iran.

Iran’s Oil Minister Bijan Namdar Zanganeh 

So what is the most likely outcome should Iran veto the production boost, and Saudi Arabia overrules it?

Well, as Bloomberg explains, there is still a small chance that Iran will comply; if the Saudi position were to prevail, it would allow the cartel and its allies to partially offset the impact of the collapse in Venezuela’s oil industry and feed fast-growing demand, mostly out of China.

On the other hand, failure would leave the Saudis and Russia with the choice of acting alone to increase production - breaching the historic agreement that ended a three-year oil slump - or do nothing a risk surging prices and supply shortages in the second half of the year.

The most likely outcome is the former, as the Saudi energy minister Al-Falih noted earlier: "our costumers have spoken loudly and we must listen to them,” in reality referencing just one "customer": Donald J. Trump. He also warned his fellow oil producers about rising consumer anxiety and the potential for high prices to have a negative impact on demand.

* * *

Iran's veto a non-factor, the next question is what shape the production boost will take. And here, it appears that as we previewed yesterday, the most likely outcome is an output boost of 1+ million b/d.

Quoting an OPEC delegated, Bloomberg said that energy ministers were focusing on the following scenarios, adjusting the group’s daily quota higher by 1 million, 1.5 million or 1.8 million barrels, the person said.

Still, any of those proposals would result in a smaller volume of oil flowing to the market than the headline number suggests because several countries are unable to increase output. For example, the 1 million barrel-a-day increase would translate to just 600,000 barrels a day of crude flowing back on to the market, according to Bloomberg calculations based on data from the International Energy Agency.

The only route to a production boost that Iran has publicly suggested -- allowing the handful of countries that have voluntarily cut deeper than necessary to restore some output -- would deliver far less extra oil to the market than any of those proposals.

If, however, the Saudi and Russian position prevails and OPEC manages to boost real output by over 1 million bpd, watch the price of oil.

And incidentally, if indeed the oil cartel is about to splinter again for the second time in four years, it is most likely that oil prices will tumble, if what happened in Nov. 2014 is any indication. Sure enough, oil fell after Iran’s walkout earlier today. Should OPEC dissolve itself again tomorrow, watch for a far greater drop in the coming days.

Comments

Escrava Isaura Unreliable Narrator Thu, 06/21/2018 - 17:03 Permalink

There are so many problems with this article that I don’t know where to start.

(President Trump who demands higher oil prices)

Not True:

President Trump took notice of the rapidly increasing US gasoline prices which are devastating his recent tax cut. He tweeted on Friday, “With record amounts of oil all over the place, including the fully loaded ships at sea, oil prices are artificially very high!”  “No good and will not be accepted!” Many observers noted that the President had the facts of the current oil situation wrong and that there were no longer record amounts of oil in storage or loaded on ships at sea. The tweet sent US futures down for a few minutes, but they quickly recovered.

 

Saudi Arabia decided it could put shale out of business by sending the price of oil so lower,

Again, not true. It’s actually the other way around:

Until recently the Saudis maintained that their goal was to maintain oil prices around $60 a barrel. Higher prices would quickly bring forth increased amounts of US shale oil and send prices lower again. A $60 a barrel price, however, would not be enough to return the kingdom to the glory days of five years ago when $100 oil made the kingdom wealthy, its annual budget was covered by oil revenues and its sovereign wealth fund was growing. Moscow has the same problem as the Saudis but is not so open about it.

 

And I could go on……..But here’s the link.

 

 

In reply to by Unreliable Narrator

gregga777 Mittens is a god Thu, 06/21/2018 - 16:37 Permalink

Article: President Trump who demands higher oil prices

Really? Why the fuck would President Trump be demanding higher oil prices?

Who the fuck have you people got doing your editing? That fuckwit British maroon BritBob? Many of your articles don't make any sense unless you already know the story in advance because you people name the wrong people, the wrong direction for prices, etc. oh and, By the way, your fucking advertising still crashes my machine. So, no, I won't turn off my AdFucker app. 

In reply to by Mittens is a god

Zerogenous_Zone Unreliable Narrator Thu, 06/21/2018 - 16:55 Permalink

gotta be a typo...

 

...Trump directly attacking OPEC (and by implication his close "friends" in Riyadh) on Twitter, demanding lower oil prices (and thus more oil production)...

 

he WANTS OPEC to splinter...thereby having them in chaos and miscalculating proper demand...fluctuating the price...and pushing for more (and better) use of our reserves...maybe?!

 

hell...it's all moot once the Tesla motive theorem is leaked (or rediscovered) and we use gravity and the spinning molten core to use repulsion AND generate free current/electricity...

 

OK...OK..i put down the peace-pipe and grabbed some twinkies...

 

​​​​​​​zerogenous_zone

In reply to by Unreliable Narrator

Sapere aude Thu, 06/21/2018 - 16:28 Permalink

Who wrote this crap article.

 

"it woefully miscalculated that shale's breakeven price was far lower than the Saudi advisors (Goldman and Citi) had estimated."

 

NO it wasn't, never has been, its far higher breakeven. Don't take my word for it, look at the accounts of U.S. shale operators, and see the massive losses they make and made even at $80

 

Love to see them increase production by 1.8million bbls a day, but they can't, then the world sees what a con this idea of an oil glut was.

If oil prices drop, that's the end of the U.S. shale industry, with rising interest rates, and companies already having sold assets off to keep drilling, and finance will dry up as everyone recognises it for the Ponzi scheme its always been

tedstr Thu, 06/21/2018 - 16:40 Permalink

Production cuts!  ha! Thats a good one.  They will keep pumping to fuel their massive welfare state and make the payments to the yacht shipyards until the price goes to zero.  Shale is fucked unil the last drop of ME oil is gone.  Meanwhile inflation is on hold and the market will love it

Snout the First tedstr Thu, 06/21/2018 - 17:07 Permalink

When I was working in the Persian Gulf, most of Saudi 's natural gas (used to generate electricity for air conditioning) production was a byproduct of crude oil production. Cut back on oil, less natural gas, less electricity, and the natives get restless without AC. People still working over there tell me the Saudis have drilled wells into formations that primarily produce gas, so the situation is somewhat eased. Somewhat.

In reply to by tedstr

SmittyinLA Thu, 06/21/2018 - 16:45 Permalink

The Deep State is OPEC, they created it, protected it and milked it, the Deep State is going down, collapse of OPEC is a side effect.

Damn Capitalist Russians!

hola dos cola Thu, 06/21/2018 - 17:01 Permalink

I don't know much about their culture, but should OPEC not come to an agreement among themselves then, from my perspective, other alliance structures between the members should become unstable.

That is something to watch out for. Because on the one side it could open Pandora's box. But if on the other side nothing meaningful surfaces that signals the before mentioned risen instability it, from my perspective, means we/the world have been had and the whole meeting (incl. the time leading up to it) has been set up as a distraction.

Personally, I think it is way beyond the point where the world should ask itself whether it really is so 'natural' that a 'special interest group' controls so much of the world oil considering they cause so much hardship and suffering for all of humanity just by the way they exercise their control for the pursuit of their 'special interest'.

Expat Thu, 06/21/2018 - 17:49 Permalink

Blah, blah, blah.

ZH used to be edgy and sometimes insane but the clickbait and feeding the nazis Trumpturds is getting out of hand.  Trump just backed down and reversed on caging children; where's the headline saing "Trump caves and gives in entirely to liberals! It's the end of America"?  Or "Rain Drop in Texas! Entire state will be covered in fifteen feet of water within days"

OPEC has had disputes, disagreements, fallouts, proxy wars, diplomatic incidents, members leaving, members joining.  They have cooperated, they have cheated.  I hardly think that one difficult meeting means it is the end of OPEC.

The problem with you Trumpturd fuckwits is you can't seem to appreciate subtlety or finesse.  You can only bludgeon or be bludgeoned.  Intellect, discourse, and conversation are unknown to you.  You want war and violence so you can feel at home like it was when you Daddy beat you.

BangDingOw Thu, 06/21/2018 - 18:02 Permalink

opec has never been unanimous about anything. they are not going to collapse because of quotas.

 

when they cut, the only countries that cut regularly are KSA, UAE, and Kuwait. occasionally the African nations go along. iran has never cut. they have always cheated. so no one is going to listen to iran about quotas because they never stick to the number themselves.

 

they are going to add production, but in reality they will be making up for lost VZ production , and the bottom number will end up the same as it's been. without a significant recession somewhere inventories will continue to drain and prices will go slightly higher to curb demand.