Tuesday, 31 May 2016

OPEC an impotent entity

OPEC, which pumps about 40 percent of the world’s oil, is scheduled to meet in Vienna on 2nd June to assess its output policy. The group is unlikely to set a production target as it sticks with Saudi Arabia’s strategy of squeezing out rivals such as higher-cost shale drillers.
Gone are the days when OPEC, led by Saudi Arabia enjoyed power to control oil price. Now it is desperately trying to retain its market share by pumping as much oil as possible. It has fallen in the trap of United States, which pampered the kingdom to raise oil price to facilitate shale oil production.
After having achieved the status of largest oil producing country, the US no longer to handhold Saudis, in fact by lifting sanctions imposed on Iran, Saudis feel the real pinch. They know Iran is adamant at attaining its pre-sanctions output. Saudi’s suffering from myopia are unable to read writing on the wall.
There can’t be any doubt that surge in supply of shale oil has reduced Saudi ability to balance crude markets. To be honest Saudis just can’t play any balancing role because of fear of loss of market share. In the past OPEC’s practice was to vary output to manage crude prices.
Market forces are too strong now, and you can’t play against those. Crude has surged more than 80 percent from a 12-year low earlier this year on signs the global oversupply will ease amid declining output in Nigeria and non-OPEC countries including the U.S.
Experts estimate current global inventories at about 5 billion barrels oil, including crude in floating storage, and say the market is oversupplied by about 1.5 million barrels a day. Just to cut production by 1.5 million barrels a day and the next day the price goes up and the other producers will take the whole share -- there is no benefit for OPEC in that.
High oil prices in recent years were an incentive for many high-cost fields to be tapped. If shale oil companies were to collapse due to financial strain imposed by low prices, this might cause another crisis like the one in 2007 and 2008, as many of them owe large debts to banks.

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