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The modern day equivalent of David vs. Goliath

There was only one time when a game of chicken was fun, and that was for two reasons: Kevin Bacon was driving a really slow tractor and Footloose had an awesome soundtrack. In the end he won simply because his shoelace got stuck on the accelerator and he couldn’t jump off in time so the other guy did.

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The modern day chicken we’ve been part of since 2014 when OPEC decided to take on US shale drillers had no music, and no accidental winners. You’d almost feel for OPEC, which has taken the hit and decided to curb production, only to watch as the US’s chest has started to swell again with price gains almost as if no lessons had been learned.

Almost.

This week OPEC ministers met with friends and foes in Houston, Texas in a bid for a truce. During the CERAWeek conference, amid debate about what the best course of action would be for OPEC, meetings took place between OPEC representatives, Russian representatives and US shale executives.

The tone has changed since the production cut deal was done. Initially the Saudi Arabian Energy Minister Khalid Al-Falih had stated it could be wrapped up after six months. This week both he and his Russian counter Alexander Novak came together in support, to say it was premature to put a date on when it would end.

The Iraq Oil Minister Jabbar Al-Luaibi was more forthcoming. “We are satisfied somewhat, but we are looking forward for improvement in the price….It is likely we need to (extend the deal past six months).” Angola had no issues with keeping on this track. Its GDP relies on oil output and supporting activities by as much as 45%, and has been badly hit by the war of the ages OPEC embarked on against the US. However it is interesting to note that both these producers, keen as mustard to continue with the cuts, have not been keeping to the agreement. Angola even started up two new projects.

It’s hard to believe they think they might get away with it. Al-Falih said that the kingdom was not going to do it alone, that it would “not tolerate free riders” and was pushing itself already to the limit to see the deal continue. With just two months before the next OPEC meeting in Vienna, it’s a critical moment for the group.

There are rumours of a ‘second wave of shale’ (ED: I know, shivers, right?). Ironically OPEC have played right into the shale drillers’ hands, by stabilising oil prices above $50pb; according to the figures US drilling has been on the up for ten months and output is the highest in a year. The Energy Information Agency says crude inventories are at record levels of more than 520m.

But there is an appreciation of the danger therein. Harold Hamm, CEO of Continental Resources said the market could be killed if producers act with abandon, as they did before. Already we’re seeing a decrease in hedge fund bets that the US price will continue to increase in the next few months.

With that in mind, we can only imagine the conversation had behind closed doors between OPEC Secretary-Gerneral Barkindo and the 20 US shale oil executives. It’s a fascinating tale – the Goliath tried to take on the Davids but ended up making them leaner and meaner. They likely feel they have the upper hand, as they forced OPEC to back down, but have they become greedier and less astute?

Fatih Birol said, “Shale oil is going to make the life of some other producers very, very challenging.” Al-Falih did not mince his words when he was pressed at CERAWeek about the US resurgence. Once again he warned against others abusing their current good fortunes: “The green shoots in the US are growing too fast. Saudi Arabia will not allow itself to be used by others..” Buckle up folks.