OPEC Is Not Dead, Just Different

From Joseph Triepke, Oilpro Managing Director

Good Morning Oilpro Readers.
In this oversupplied market, OPEC has been producing 32.1 mmbpd, above their stated quota of 30.0 mmbpd. This context made OPEC's meeting last Friday in Vienna a seminal moment in the 2015 downcycle. But al-Badri knocked the wind out of expectant OPEC watchers when he skipped the part about production levels and quotas in his official statement. OPEC appeared to kick the can, rendering quotas meaningless and suggesting that a production free-for-all lies ahead.

With delegates unable to agree on virtually anything (we wonder if arguments erupted over the take-out menu as the meeting ran longer than usual), OPEC has reached a stalemate. Each member supports cuts from every other producer, but each will pump near their own max to offset price declines with volume.

OPEC, meet capitalism. Capitalism, OPEC. The oligopoly's ability to control prices is gone for now as each member acts in their own self-interest in an oil-market transformed by US light tight oil (LTO).

Some members are playing the long-game and others the short-game. Either way, the result is the same: production above targets. For example, Saudi oil minister Ali Naimi fears an oil-market “Black Swan" in the long-run. This is the idea that peak oil demand plus new supply sources could devalue and strand the Kingdom's vast oil reserves over the next 40 years. This risk means Saudi must pump as much as possible now. In the near-term, Iran is shoving its way into the room of exporters, but no one is willing to make room for them next year, especially lesser OPEC nations who will struggle to fund social spending in 2016.

US oil prices have fallen 13% since the meeting. That's because the disharmony and implied shift to "petro-capitalism" could send OPEC production higher by millions of barrels per day in 2016, a notion that rattled the markets. Did anything really change last week in terms of OPEC policy? Nope. But that's the point.

A realization is growing in the market that OPEC is powerless to support prices right now as the group is in full-out price discovery mode. The only way OPEC saves the price of oil now is if it becomes "GLOPEC" - non-OPEC producers would have to also curb their production to elicit a Saudi cut. This kind of global participation seems highly unlikely.

Since the meeting, enough OPEC commentary has been written to fill a good-sized library. Some argued OPEC is dead, while others argued reports of OPEC's death have been greatly exaggerated. As my colleague Jeff Reed pointed out last week, OPEC's inaction seems to violate its mission statement. This is akin to malpractice, but malpractice doesn't equal death. In the best OPEC piece we've read all year, Antoine Halff argued that while OPEC production cuts have been rendered counterproductive by LTO, the group is implementing an effective oil market strategy. OPEC is not dead, just different.