Bloomberg's energy and commodities columnist Javier Blas wrote on Monday that OPEC+'s loss of control over oil prices is self-inflicted, and to save itself, it must quickly acknowledge its policy mistakes. The following is the full content.
The most explosive scandals often begin when someone somewhere decides to say something completely shocking but true.
A senior OPEC+ official openly expressed what many have privately thought – that the group has been keeping oil prices at an excessively high level, effectively subsidizing its competitors. The result is that it cannot increase production and can only rely on continuously increasing production cuts.
On November 26, Afshin Javan, the number two person in Iran's OPEC+ delegation, published a commentary on Iran's official news agency Shana. He believes that the 'oversupply' the group is facing, after several years of production cuts, is largely self-inflicted. He stated, 'This price-supporting strategy effectively encouraged an increase in supply outside of OPEC, especially from the U.S.,' and 'this will limit OPEC+'s room to ease restrictions.'
This commentary went on to state a fact that even few people discuss behind closed doors: the current policy is prompting Angola to exit OPEC+, and other countries may soon follow suit. Javan warned that Gabon, Equatorial Guinea, and the Republic of Congo 'may reconsider their membership.'
Within hours, this column was deleted without explanation. However, damage has already been done in the lead-up to the next OPEC+ meeting. This commentary is akin to the truth spoken by the child in 'The Emperor's New Clothes'.
OPEC+ has now postponed the meeting originally scheduled for December 1 to December 5, as Saudi Arabia tries to formulate a production plan to keep oil prices rising. As early as June of this year, the group announced an agreement to gradually increase oil production from September 2024 to the beginning of 2025. However, weak oil prices have forced OPEC+ to postpone production increases twice, first from September to October and then from October to January.
The delay in the meeting has given the group extra time to decide what to do next. Saudi Arabia is not ready to admit defeat. Representatives told me that Saudi Arabia is at least pushing for a third delay in increasing production, postponing it by three to six months. The country is also discussing the possibility of further production cuts, but so far, member states have shown no interest in this proposal.
Meanwhile, Saudi Arabia is trying to force Iraq and Kazakhstan to comply with OPEC+'s production limits. These two countries, along with Russia and the UAE, often exceed their quotas. Kazakhstan has spent billions of dollars expanding its largest oil field, and therefore the country is protesting for OPEC+ to recognize its right to produce more oil next year. Representatives told me that this struggle has the potential to undermine any agreement on December 5.
In any case, in the end, the Iranians will be right: OPEC+ is subsidizing the production growth of its competitors, and the longer this situation continues, the harder it will be for the group to find a strategy to exit production cuts. Of course, if Trump is elected president, he might be able to curb Iran and Venezuela's oil exports, which could create an outlet for Saudi Arabia. But this would not be a sign of OPEC+ policy success; rather, it would indicate that the group is letting the White House dictate terms.
Year-to-date, the average price of Brent crude oil is around $80.5 per barrel. Since September, oil prices have been low enough to cause some pain for U.S. producers. Nevertheless, an oil price of $70 to $75 per barrel is still not enough to halt the development of the U.S. shale oil industry. A key reason is efficiency; another reason is that, historically, an oil price of $70 per barrel is quite good. It's worth noting that the average price of Brent crude oil was $63 per barrel between 2017-2019, during which U.S. producers were still increasing production by about 6 million barrels of crude oil and other fuels daily.
The International Energy Agency (IEA) estimates that the U.S. shale gas industry is very good at drilling, and the drilling costs are so low that today only 300 rigs are needed to accomplish what required 500 rigs five years ago. The CEO of top shale oil producer Diamondback Energy Inc., Travis D. Stice, recently told investors that he initially planned to use 22 to 24 rigs next year but now believes that only 18 rigs are needed to complete the job. 'This is purely based on continued efficiency improvements,' he said.
Even with high oil prices, geological factors will eventually cause the U.S. shale gas industry to stagnate. But that day has not yet come. The longer OPEC+ attempts to raise oil prices, the deeper the hole it digs for itself, making it increasingly difficult to increase production. OPEC+ officials know this, but few dare to speak out. But they need to do so, or they will regret it in the future.
Article shared from: Jinshi Data