This article was published by The McAlvany Intelligence Advisor on Friday, November 18, 2016:
There are at least two problems with Saudi Arabia's oil minister's dream as he expressed it on television on Thursday: one, he doesn't know what he's talking about, and two, what he does know is wrong.
Mark Twain put it well: “It's not what you don't know that kills you. It's what you know for sure that ain't true.”
Saudi Arabia's Energy Minister, Khalid al-Falih (shown), still thinks opec can impact the world oil markets the way they were able to just a few short years ago:
Reaching (a decision in Vienna in two weeks) to activate that ceiling of 32.5 million barrels per day will speed up the (market) recovery and will benefit producers and consumers….
I'm still optimistic that the consensus reached [last month] for capping production will translate … into caps on [each cartel member's] levels.
He also added that he “hoped” an agreement the cartel might reach would be honored by non-OPEC member Russia.
There are so many things wrong with his statement one scarcely knows where to begin. First off, higher oil prices don't benefit consumers, only producers. Second, “activating” that “ceiling” will do precious little to “speed up” the time when the oil markets will come into balance. In fact, according to economic theory the oil markets will never come into balance: they will change daily, even hourly, reflecting the decisions made by millions of producers and consumers to consume or sell oil and natural gas or their by-products. That “balance” is pure myth.
Next, the OPEC cartel has a history of abrogating even the most solemn of agreements. Iran has opted out, and Libya and Nigeria are trying to restore their production from before wars and other military actions took production facilities offline.
There's this from Jefferies, the global investment firm:
We have been skeptical that OPEC would be able to reach agreement on an output cut unless Saudi Arabia was willing to resume its role as swing producer.
We do expect that OPEC will make some form of statement [not agreement] on production restraint … [although] the credibility and transparency around collective OPEC actions … are far more uncertain.
A surge in OPEC production output to as much as 34.5 million barrels per day in November (vs. 33.5 million bpd in August) makes a credible OPEC cut all the more difficult to achieve….
We may need to immediately reverse [our opinion] if OPEC meets its goal of transparent and credible action. However, we are now two weeks away from the physical market regaining control from OPEC's rhetorical devices.
That's recognition from Jefferies that in the past OPEC could swing the markets just with words. Those days are over.
There's the increase in inventories of crude oil just announced by the EIA (Energy Information Administration): up by 5.3 million barrels in just the last week, well above “the upper limit of the average range for this time of year.”
And then there is the report from the U.S. Geological Survey (USGS), also released on Wednesday, that it has just found “the largest continuous oil and gas deposit ever discovered in the United States.” The new reserves in the Wolfcamp shale formation in texas contain “nearly three times more petroleum than the agency found in North Dakota's Bakken shale in 2013” and “is nearly three times the amount of petroleum products used by the entire country in a year.”
Finally, there's Donald Trump, the man who, unlike most politicians, is determined to keep his campaign promises. His energy plan confronts OPEC directly. “We will,” wrote Trump:
- Make american energy independent;
- Create millions of new jobs;
- Unleash an energy revolution;
- Declare American energy dominance a strategic and foreign policy goal of the United States;
- Unleash America's $50 trillion in untapped shale, oil, and natural gas reserves; and
- Become, and stay, totally independent of any need to import energy from the OPEC cartel or any nations hostile to our interests. (emphasis added)
The only thing certain is that OPEC will be holding its meeting in Vienna, Austria, on Wednesday, November 30. In the new world – the world of which OPEC and its primary mouthpiece from Saudi Arabia seem to be totally oblivious – little else is likely, or expected.
Sources:
NPR.org: USGS Announces Its Largest Oil And Gas Discovery Ever In The States
Rigzone.com: Saudi's Falih Urges OPEC To Cut Oil Output To Low End Of Target
Rigzone.com: OPEC Cut of ‘At Least 700,000 Bpd' Needed to Bring Market Balance
EIA.gov: Summary of Weekly Petroleum Data for the Week Ending November 11, 2016
DonaldTrump.com: AN AMERICA FIRST ENERGY PLAN
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