oil prices and opec
TRANSCRIPT
Three key issues for OPEC and other oil producers
Does OPEC have any long-term control over oil prices?
How should OPEC respond to threat from U.S. shale?
What does that mean for the price outlook in 2017/18?
OPEC’s objectives as outlined in its founding statuteAgreed at Caracas in January 1961
Coordination of members’ petroleum policies
Stabilisation of international oil markets
Elimination of harmful and unnecessary fluctuations
Securing a steady income for producers
Efficient, regular and economic supply to consumers
Fair return on capital for investors in the oil industry
OPEC’s priority has always been revenue maximisationBut specific focus has shifted over time
Focus on taxes and royalties 1940s-1960s
Focus on official selling price 1960s-1980s
Focus on ownership of reserves 1960s-1970s
Focus on controlling production 1980s-2010s
Prices have been higher but more volatile in OPEC eraOPEC has not managed to tame the oil industry cycle
OPEC has limited impact on oil pricesBig changes in oil market have come from other sources
Supply-side developments
North Sea
Alaska
China
Soviet Union
Deepwater
Megaprojects
Shale
Demand-side developments
Fuel switching
Fuel economy
East Asian Tigers
China
(Electric vehicles?)
OPEC cannot successfully monopolise/cartelise marketMarket share not high enough and cannot prevent new entrants
OPEC is more a price-taker than a price-makerOPEC decisions have marginal impact on evolution of price cycle
OPEC had no identifiable impact on price trend in 2017Prices might have been lower w/o cuts, but so might shale drilling
Oil market showed signs of rebalancing pre-OPEC accordFlat prices and calendar spreads both rising since early 2016
OPEC’s stated ambition: to accelerate rebalancing trendContango has continued to narrow, but no backwardation yet
Putting OPEC in perspective
OPEC has had some limited impact on prices in the very short term
OPEC has little or no impact on prices in the medium and long run
OPEC has not been able to tame the inherent volatility of oil market
OPEC has not been able to prevent market entry
OPEC is more a price-taker than a price-maker
OPEC adapts to rather than shapes market environment
U.S. oil production is rising again (mostly GoM so far)Shale production tends to lag rig count by 6 months
U.S. oil production forecasts revised upwards repeatedlySurprising speed and strength of drilling boom
U.S. onshore drilling costs have stayed low but set to riseDrilling costs normally follow rig count with 2-3 month lag
Issues for OPEC (and non-OPEC allies)
OPEC delayed planned market rebalancing by its own actions
OPEC made life harder for itself by boosting output pre-agreement
OPEC made life harder for itself by supplying market from own stocks
OPEC may be able to drain global inventories back to 5-year average
But
OPEC faces renewed challenge to market share from shale producers
OPEC’s ability to boost prices constrained by threat from shale
Summary of current situation (1)OPEC is trying to accelerate rebalancing process
Crude oil market has been gradually rebalancing since early 2016
Transition from oversupply in 2014/15 to undersupply in 2018/19
Flat prices and calendar spreads both up significantly pre-OPEC
Compliance with OPEC deal appears good (mostly due to Saudi)
Hedge funds bought into OPEC’s rebalancing narrative
Hedge funds pushed prices and spreads too far, too soon
Summary of current situation (2)Some progress on draining stocks
Crude stocks appear to be falling
Invisible stocks becoming visible
Supply & demand close to balance
Inventory overhang remains large
Rebalancing seems to be happening
Slowly at first, likely to accelerate
Summary of current situation (3)Strategic issues for OPEC
Uncertainty around reactivation of U.S. shale
Higher prices versus protection of market share
Protection of relationships with refiners in Asia
Summary of current situation (4)Key uncertainties in the medium term
Uncertain timing of crude oil market deficit and stock drawdown
Uncertain breakeven price of U.S. shale producers (cyclical costs)
Uncertain breakeven price for oil majors and offshore (costs again)
Uncertain global economic outlook (Trump, Brexit, macro-cycle)
Uncertain recovery in commodity-dependent emerging markets
OPEC compliance and eventual relaxation of output curbs
Concluding thoughts
Traders, analysts and journalists focus heavily on OPEC but other
factors are likely more important in driving prices
OPEC has very little control
OPEC should avoid complicated and probably unworkable market
management schemes
Central planning has always proved unworkable (just ask Gosplan!)
so better to rely on price signal to balance the market
Oil market seems set to remain well supplied even at current prices
for the rest of 2017/18
Price (not OPEC) will move to constrain the growth in shale output
to ensure it grows in line with demand