When OPEC declared last month that it would do what it takes to shore up oil prices, no-one really believed them. ‘Doing whatever it takes’ wasn’t more of the same; it should have been a dramatic change of action. That wasn’t plated up and served to the waiting crowds, and so ever since the market has been testing the group’s resolve.
But it seems this cartel is not for moving. Not even for a spectacular drop of 18% in prices in 20 days.
One of the most important indicators that OPEC is committed to driving change is a drop in output. Yes, there was a sharp decrease in the volume Saudi Arabia loaded onto tankers in April compared with October last year, but the most recent information from tanker tracking firm ClipperData suggests that crude loadings for June seem to be on the up. Libya’s production has also gone beyond 900,000 bpd, which is a new high but officials are already aiming higher: the target is 1m bpd, and they want to hit it next month. Of course Libya and Nigeria are exempt from the deal to reduce production (it wasn’t exactly a licence to up production, but they did anyway) but even for those who are on the inside, compliance has never been 100%. Apparently this was the source of discord between Saudi and Russia at an HIS CERAWeek meeting a few months back.
Of course, it’s simply not possible to blame OPEC for all the trouble. For the 22nd week in a row, US shale producers increased the number of operational rigs. There are currently 747 on the go. The International Energy Agency says that production could be up 920,000 bpd compared to last year – and there’s still room for this to grow. When you total this up, it’s clear to see that almost three-quarters of the cuts being delivered by OPEC are being cancelled right here.
As you read on, you will likely experience more than a slight sense of déjà–vu. Ian Taylor, head of the world’s largest independent oil trader Vitol, told Reuters that Brent prices would stay in a range of $40-$55 a barrel for the next few quarters. Bryan Rich writing for Forbes said: “Remember, oil in the low $40s is the danger zone for the shale industry and oil producers, and it quickly escalates to banks and the broader economy.”
There are further concerns about the news from Kpler, the French tracker tanking company, that floating oil storage hit a record high – with 111.9m barrels bobbing about on the ocean. As Jamie Webster from Boston Consulting Group’s Center for Energy Impact told Bloomberg it’s the last thing traders want to hear. “The fact they’re growing shows the nightmare in oil isn’t over. OPEC hasn’t cut enough to solve this problem. It’s good OPEC has cut but they’re not the only game in town anymore.”
Is there any reason to expect shale to change course? The 2017 capital budgets were set when oil was going for $50. That is impacting on some but not others. Tim Dove, CE of Pioneer Natural Resources Co, speaking at a JP Morgan energy conference in New York, said: “We will not drill into oblivion.” However a $45 environment wasn’t concerning – they’d “pare away and still be a growth company.” Occidental Petroleum Corp’s CEO Vicki Hollub said they can work with a $40 pb price, by shaving $1bn from capital spending: “We do believe we need to be prepared for (that) but we recognise the fundamentals do not support that.”
Are we doomed to yet another game of chicken, to see who can go lowest for longest? As the saying goes, those who do not learn their history are doomed to repeat it.