EDITOR: | December 2nd, 2016 | 4 Comments

Global oil market at crossroads

| December 02, 2016 | 4 Comments
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Yesterday’s decision of global oil-producing nations to limit and reduce the volume of production can be to some extent compared with Brexit and Donald Trump winning the US presidential elections. In terms of surprise, it is the first time since 2008, OPEC has been able to resolve its internal differences and reached an agreement on the reduction of it’s output, however the consequences of it’s implementation remain cloudy.

According to the results of yesterday’s summit of OPEC, oil production in the cartel will be reduced by 1.2 million barrels per day, bringing down oil production to 32.5 million barrels from 33.7 million barrels per day. The reduction will take into effect on January 1, 2017 and will last six months. Russia has agreed to cut it’s production by 300,000 barrels per day. According to OPEC, the current average daily oil production is estimated at 33.64 million barrels per day.

The agreed reduction, will unlikely result in a significant increase of global oil prices, as a reduction of 1.2 million barrels, will not be enough to ensure the growth of prices, even if the cost per barrel goes up to $58-59US per barrel, since almost all oil producers have increased their volume of production in recent months, to the maximum figures since 2010.

The growth of global economy, according to the majority of analysts, should become the major driver for the fundamental growth of oil prices for the coming years.

At the same time, even the signing of an agreement does not give guarantee of it’s implementation, as the level of credibility of it’s participants to each other remains low.

In theory, higher oil prices provide more funds to the budgets of oil-producing nations, however in contrast, to production, these prices are less predictable and less controlled. Given that Middle Eastern countries are very sensitive of any increase in the production by their neighbours, then a violation of a quota by one country may result in the beginning of a chain reaction. Taking into account that Libya and Nigeria were not included in the quotas, this means that the reduction will not affect, at least a third of all OPEC.

The situation is complicated because of the exclusion of Indonesia – the main opponent of any production cuts – from the organization prior to yesterday’s discussion. This means that other countries may lose part of its market share in favor of Indonesia.

From 2000 to 2016, the volume of oil production by OPEC countries in the volumes, stipulated by quotas, lasted for 5 months. In addition, from 2009-2012 the excess of production over quota was more than 3 million barrels per day and 4 million barrels per day in 2007.

Members of OPEC and Russia are aware that the increase of oil prices (US$58-59 per barrel) will result in the influx of the US shale oil, to the EU and Asian markets, which will mean the beginning of a new exhausting war for market share, but at extremely low prices for resources.


Eugene Gerden

Editor:

Eugene Gerden is an international free-lance writer, based in St. Petersburg, who specializes on writing in the field of mining, metals and rare earth metals. ... <Read more about Eugene Gerden>


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Comments

  • Dr. Mike Hirschberger

    Hi Eugene

    What you say is true. This is akin to the old homily from Ben Franklin’s Poor Richard’s Almanac: “3 can keep a secret, if 2 are dead”. Bragging rights for the first violators bring much needed publicity to the likes of IRAN and IRAQ-2 countries unlikely to agree on anything else.

    Also, now that we have entered the post shakeout period for fracking in North America, many cost estimates have been sharply revised downward. I have been led to believe that current prices of $50/bbl are high enough for many frackers to re enter or step on the pedal for aggressive production. This all assumes that a price floor at current levels of around $50/bbl would be sustainable. Not all agree with that statement.

    The other less tangible sentiment regarding oil prices is that should a spike occur and a $60/bbl price tag would stick, an acceleration to EV conversion would likely occur. If we said that 2 or 3 years ago, most would dismiss us out of hand. But, now that EV purchases in the US have passed 1% per month (Nov’16-EV purchase were >40% higher y/y @ 1,1% of sales), this hypothesis is taken more seriously.

    To quote the ‘Greenies’: 1 EV purchase reduces gasoline demand 200,000 gals over the life of the EV, So, the effect of EV conversion is cumulative. permanent-and likely irreversible.

    One only needs to observe the massive EV retooling occurring in Germany amongst the Big 3 (an automotive intensive country who had defended the ICE routinely-until this year).

    I am not a tree hugger, but realistically Tesla has had an effect on the psyche of many new car purchasers in the States. A price spike would likely just push many over the tipping point-esp if a solar roof and wall battery open up a new vista for the average household’s view of energy.

    Higher oil prices would act like a governor on gasoline demand in Europe, the US and even Asia. Diesel is being banned around the world. And, when one adds higher fuel efficiencies to the equation, pump demand may have already topped out.

    December 5, 2016 - 11:03 AM

  • Tim Ainsworth
    December 5, 2016 - 11:23 AM

  • Tim Ainsworth

    BTW, in preference to being a lab rat, plan on contributing to the trickle down effect, ordering AMG E63 S next month.

    http://www.espn.com.au/f1/story/_/id/15097284/how-two-cylinder-engines-f1-technology-redefine-road-cars

    December 5, 2016 - 11:37 AM

  • hackenzac

    Hybrids are the real sleeping giants. F1 gains are nice but so are hybrid locomotives by Siemens and GE for example and marine hybrid propulsion systems. Large mass means a large potential for energy regeneration. Jon Petersen explained here well enough, hybrids are the best bang for the buck but especially for larger transports which maybe is underappreciated as a consideration. Hybrid 18 wheelers make far more sense than straight electric ones.

    December 5, 2016 - 2:05 PM

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