Bloomberg Energy and Commodity columnist Javier Blas wrote on Monday that OPEC+ losing control over oil prices is self-inflicted, and to save itself, it needs to quickly acknowledge its policy mistakes. Below is the full text.
The most explosive scandals often start when someone somewhere decides to say something completely shocking yet true.
A senior OPEC+ official publicly expressed what many have privately thought — that the group has been keeping oil prices at excessively high levels, effectively subsidizing its competitors. The result is that it cannot increase production and can only rely on continuous production cuts.
On November 26, Afshin Javan, the second-in-command of Iran's OPEC+ delegation, published a commentary on the Iranian official news agency Shana. He believes that the 'oversupply' faced by the group, after several years of production cuts, is largely self-inflicted. He stated, 'This strategy to support prices has actually encouraged supply increases outside of OPEC, particularly from the United States,' and 'this will limit OPEC+'s room to ease restrictions.'
This commentary goes on to state a fact that even very few people discuss behind closed doors: the current policy is driving Angola out of 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 child's truth in 'The Emperor's New Clothes.'
OPEC+ has now postponed its meeting originally scheduled for December 1 to December 5, as Saudi Arabia attempts to formulate a production plan to keep oil prices rising. Back in June, the group announced an agreement to gradually increase oil production starting from September 2024 until 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 yet ready to admit failure. Representatives told me that Saudi Arabia is at least pushing for a third delay in production increases, postponing it for three to six months. The country has also discussed the possibility of further production cuts, but so far, member countries have shown no interest in this proposal.
Meanwhile, Saudi Arabia is trying to force Iraq and Kazakhstan to comply with OPEC+ production limits. Both countries, along with Russia and the UAE, frequently exceed their quotas. Kazakhstan has spent billions of dollars to expand its largest oil field, so the country is protesting for OPEC+ to acknowledge its right to produce more oil next year. Representatives told me that this struggle could jeopardize 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. The longer this situation continues, the harder it will be for the group to find a strategy to exit production cuts. Of course, if Donald Trump is elected president and can curb Iranian and Venezuelan oil exports, he may 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 being manipulated by the White House.
Year-to-date, the average price of Brent crude oil has been around $80.5 per barrel. Since September, oil prices have been low enough to cause some pain for U.S. producers. Nevertheless, oil prices of $70 to $75 per barrel are still insufficient to halt the development of the U.S. shale oil industry. One 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 from 2017 to 2019 was $63 per barrel, during which U.S. producers were still increasing production by about 6 million barrels of crude oil and other fuels per day.
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 can accomplish what required 500 rigs five years ago. Travis D. Stice, CEO of top shale oil producer Diamondback Energy Inc., recently told investors that he initially planned to use 22 to 24 rigs next year but now believes that only 18 rigs will be needed to get the job done. 'This is purely based on ongoing efficiency improvements,' he said.
Even with high oil prices, geological factors will eventually stall the U.S. shale gas industry. But that day has not yet come. The longer OPEC+ tries to drive up oil prices, the deeper the hole it digs for itself, leading it to be unable 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 reposted from: Jin Ten Data