We follow Fundamentals and Technicals and from them assess the market and then there is OPEC. Whereas there is some logical synergy between Fundamentals and Technicals, OPEC is the maverick. The world is now awash with both oil and gas with OECD oil stocks at just under 3bnb giving around 63 days’ usage. Saudi Arabia is alone as the only OPEC member that can cut production enough to make a difference. It has learnt, to its cost, that when it cuts, other OPEC members and non-OPEC producers will step in and take its market share.
With the higher prices in the lead-up to last December, Saudi had lost much of its US market share to Shale. Since then, it has attempted to replace that lost business by breaking into the European Markets which have been the traditional market zones of Russia. It is discounting prices to compete with Russia and the US plus other OPEC members and it would not make sense to cut now and revert back towards the position held prior to December 2014.
OPEC has priced itself out of the market and should now expect to sell oil at the price determined by the market, as it has always claimed it should be, and not set against excessive budget needs. Furthermore, all members need to diversify. All producers are suffering the impact of the lower prices but of Saudi and Russia, Saudi could outlast Russia but without synergy between the two in terms of curbing output they are destined to continue competing until either one collapses or demand rises significantly to support them.
By letting the oil flow find its own level, Saudi was hoping that others might agree to a cut or that alternative energy sources, like shale, would suffer due to lower prices. The US shale rig count and output have both fallen but overall output still exceeds demand. It has some way to go before it balances.
Meanwhile Iran is planning to push another 1mbpd+ into the market and is already looking for partners to work with it. It is not interested in talking about cuts! More bad news for Venezuela who can usually count on Iran to support the call to cut. This time Venezuela is isolated and facing financial ruin.
Under Hugo Chavez, PDVSA was mismanaged and revenue spent on non-energy related projects and since Nicolás Maduro has taken over, there has been no change. Elections are due to take place this weekend yet the leader of the Opposition Leopoldo López is in jail and his wife Lilian Tintori who is campaigning for him, fears for her life. It will be a difficult one for the opposition to win but without reform Venezuela cannot survive. In February, PDVSA published figures claiming that oil production in the Orinoco Oil Belt was at 1.3mbpd and that this could increase to 4mbpd by 2019, so in the next three to four years, Venezuela should not be looking to cut either although, today, it was calling for an OPEC cut of 1.5mbpd!
If non-OPEC producers like Russia had supported the move to cut, it would have worked in the short term but with the US on the verge of exporting oil there will soon be another contender for a European market share.
Historically, the market has been self-regulatory and demand has traditionally been driven by price but today, after five years of high pricing consumers have moved towards alternative energy sources, energy efficiency and conservation while being mindful of climate change and the impact of continued use of fossil fuels. OPEC knew that this would happen but enjoyed the benefits of higher pricing and those that did not plan for the future and diversify will now have difficulty in surviving. It will be an ideal time for all producers to evaluate and adjust domestic subsidies.
