Market forces catch up to OPEC

Scott Tong Nov 26, 2014
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Market forces catch up to OPEC

Scott Tong Nov 26, 2014
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OPEC meets Thursday to set production levels, without much for its member countries to be thankful for. Oil prices have fallen quickly. And a new big rival is on the block: U.S. production of oil from fracking. Some analysts are already proclaiming “Move Over OPEC” and declaring “a new oil order.”

We’ll ask it this way: Are OPEC’s best days behind it?

Analyst Bob McNally, founder and president of the Rapidan Group, has argued for a while that OPEC is on the wane. In his view, it would be the third cartel-type oil group in history to peak and decline. The first:

“John Rockefeller and Standard Oil in the late 1800s,” McNally says, “who came along and thoroughly, some would say brutally, organized and controlled the pipelines, the refineries and the upstreams. And he brought stability to what was in the beginning wildly gyrating prices.”

Of course, trustbusters broke up Rockefeller’s company. Then came cartel 2.0: the Texas Railroad Commission. Starting in the 1930s, it pulled various levers to control prices.

The key was retaining so-called spare capacity. When prices rose and threatened to turn away consumers, the commission arranged to bring more oil to market and soften prices.

But by 1972, the North American supply tailed off. There was no spare left.

“What that meant was we were losing our ability to control the global oil price and to stabilize the market,” Rapidan says. “And that signified the transfer in power over to OPEC.”

Click below for more from Bob McNally:

 

OPEC, the Organization of Petroleum Exporting Countries, formed in 1960 to counter the power of multinational oil companies. Now it controlled elements of supply and prices. In 1973, OPEC’s Arab members cut off supply to the U.S. for political purposes.

Global crude analyst Jamie Webster at IHS Energy says a relatively recent big moment for OPEC came in 2008: The group artificially withheld more than 2 million barrels of oil a day from the market. Oil prices revived.

Still, Webster says the world has changed. For one, embargoes may be history.

“The oil market has turned into a real, truly global interconnected market,’ Webster says. “You can’t just pick a country and say ‘We’re not going to deliver there.’ Somebody else will.”

Click below for more from Jamie Webster: 

And, many OPEC members today drill less oil than before. In the meantime, a supply competitor has shown up. Fracking in America coaxes oil from shale rock.

Shale oil has helped push today’s prices down. And the more they fall, the more likely shale could tail off and bounce prices back up. In other words, the U.S. may be the new price-controller.

“This massively undermines the ability of the OPEC nations,” says Ian Bremmer, president and founder of the Eurasia Group global consultancy.

In this low-price environment, Bremmer says OPEC countries like Saudi Arabia struggle fiscally. They rely heavily on selling expensive oil.

“The Saudis are trying to fund places like Egypt and Jordan to maintain stability in the region,” Bremmer says. “So they can’t really afford to try to drive prices down to compete with American producers. And so that means the United States is in the driver’s seat, right?”

Click below for more from Ian Bremmer:

Right? Perhaps, though outside the U.S. some analysts are calling hyperbole.

“I don’t think we need to talk about anything like a new pricing order,” says Robin Mills at Manaar Energy Consulting in Dubai and author of “The Myth of the Oil Crisis.”

“There’s certainly no grand scheme behind this. It’s the simple working of the market and economics,” she says.

As he sees it, this is just another bout of low prices, one that key OPEC countries can weather.

“They still have enormous sovereign wealth holdings that they can draw on for years to come to prop up a deficit,” Mills says. “And, of course, they can borrow. There’s nothing magical about borrowing.”

And perhaps nothing new about a new supplier on the block. Veteran OPEC watchers have seen this before.

“For example, in the North Sea and Norway and the U.K.,” says London energy economist Leo Drollas, who spent two decades at a think tank run by an ex-Saudi oil minister. “We’ve seen the great surge in Russian production in Kazakhstan. In a sense, the natural state of the oil business is one of imbalance.” 

But, how imbalanced is it today? How high and how long can the upstart U.S. shale story go? That is a key question for OPEC, tomorrow and beyond.

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