This article was published by The McAlvany Intelligence Advisor on Wednesday, March 22, 2017:
A measure of the success – and failure – of OPEC’s agreement to limit crude oil production can be seen in the chart of NYMEX crude oil price behavior (Sources below) dating from last fall. When the agreement was inked back in November, crude was at $46.50 a barrel. The price soared and traders got excited, putting in long bets that set records.
By early January, reality began setting in as compliance among the cartel’s members and non-members (who agreed to go along for the ride) began to wane. The roof fell in a couple of weeks ago when inventory builds continued to set records, and the price dropped through support at $50.
In other words, in OPEC’s attempt to birth an elephant, it succeeded in birthing a gnat.
Saudi Arabia maintained a stiff upper lip during the Houston oil conference, stating flat out that those members and nonmembers out of compliance wouldn’t be allowed a “free ride” at its expense. But that defiance was short-lived as the Saudis cut their production 60 percent below its goal, 800,000 barrels per day instead of 500,000.
Now comes news that the kingdom’s exports to the United States for the week ended March 10 fell by 425,000 barrels a day, the sharpest weekly drop since the cartel’s November agreement to limit production. The Saudis tell observers that it wants to concentrate its marketing efforts closer to home: Russia, China, France, Spain, and Italy. That cut reduces Saudi exports into the US to just 12 percent of all American crude oil imports. In the 1990s, those exports counted for a third of all US imports.
But evidence of the cartel’s continuing failure has shown up during its efforts to expand exports to China, Russia, France, Spain, and Italy. The Saudis now face competition, not coordination, from its “friends” in the cartel. China is cutting special deals with Russia, cutting the Saudis out. Iran and Iraq are raiding Saudis’ customers in France, Spain, and Italy. So much for “cooperation.”
Meanwhile American oil producers are ignoring the troubles facing Saudi Arabia and its failing cartel. It has added more than 400,000 barrels per day of new production since the November agreement, and continues to bring idled rigs back to life. It now has more than 750 operational rigs, compared to just 267 a year ago.
In the United States, seemingly oblivious to OPEC’s problems, the oil industry continues its renaissance. The Energy Information Administration expects Permian Basin (West Texas) production to jump by 70,000 barrels a day next month, while drillers in the Eagle Ford region (Southeast Texas) are ramping up production there as well, with estimates of new production there jumping by 28,000 barrels per day in April, twice recent estimates by the EIA.
The Saudis are enjoying Haman’s noose (see Esther, Chapters 3 and 7). Their plan to force the American oil industry into bankruptcy has backfired. That industry, thanks to technology that continues to reduce the breakeven point for oil well production, has rebounded and now threatens not only the OPEC cartel but the Saudi kingdom as well. Burdened with debt, continuing to borrow to sustain its welfare state, and trying to raise the price of oil so that the sale of part of Aramco generates sufficient funds to diversify it oil-centric economy, the kingdom appears to be late in recognizing the new reality.
The meeting scheduled for May 25 to determine whether or not to continue the failed agreement should tell a lot. If they extend it, compliance will suffer further as members get tired of waiting for the promised price increases to appear. If they don’t extend it, that will serve notice that OPEC no longer has sufficient influence to sway the oil markets in their direction.
As the old saying goes, “Justice is like a train that is nearly always late.” For the OPEC and its de facto leader, the train has arrived.
The Wall Street Journal: Saudi Arabia’s Oil Supremacy Falters
OilPrice.com: U.S. Shale Is Pushing OPEC To Breaking Point
OilPrice.com: “No Free Rides,” Say Saudi Officials to US Shale
Money.CNN.com: Is OPEC headed for a showdown with U.S. shale?