OPEC publication urges non-members to help stabilize oil market

[FBaggins]

OPEC has criticized unidentified non-member countries for their refusal to cooperate with the oil exporter group in propping up prices and repeated its call for them to do so.

"There is a stubborn willingness of some non-OPEC producers to adopt a go-it-alone attitude, with scant regard for the consequences," said the commentary in the latest edition of the monthly OPEC Bulletin.

"In the past, OPEC has often shouldered the burden of ensuring oil market stability alone. In the current situation, which should be of great concern to ALL, is it not time for this burden to be shared?"

The Organization of the Petroleum Exporting Countries last year refused to cut its oil output after non-member countries including Russia declined to offer output curbs, deepening a slide in oil prices.

http://finance.yahoo.com/news/opec-publication-urges-non-members-151653042.html

Incredibly brazen. This is tantamount to a claim that not only are cartels not a bad thing...but the rest of the world's oil producers should join OPEC and let them manipulate world oil markets for their own benefit (and to the detriment of worldwide consumers and their economies)

[happyslug]

1. So what Oil Exporters, beside Russia, Canada and Norway, are NOT members of OPEC?

Country Exports in Thousands of barrels per day

1-- Saudi Arabia..............8,733 -- OPEC Member
2-- Russia.......................7,249
3-- United Arab Emirates...2,743-- OPEC Member
4-- Kuwait.......................2,345-- OPEC Member
5-- Iraq...........................2,289-- OPEC Member
6-- Nigeria.......................2,070-- OPEC Member (also well known cheater)
7-- Venezuela..................1,905-- OPEC Member
8-- Qatar........................1,847-- OPEC Member
9-- Angola.......................1,756-- OPEC Member
10- Canada.....................1,643
11-- Norway....................1,603
12-- Kazakhstan...............1,400-- Closely allied with Russia
13-- Algeria.....................1,383-- OPEC Member
14-- Iran.........................1,322-- OPEC Member
15-- Mexico........................ 864-- In Rapid Oil Production Decline

http://www.eia.gov/countries/index.cfm?topL=exp

OPEC Membership:

http://www.opec.org/opec_web/en/about_us/25.htm

Thus this is aimed at Russia (and its close Ally Kazakhstan) more than Canada, Mexico or Norway (the First Two are under strong US influence, so should never join OPEC). The old joke about OPEC was OPEC was the tail of the dog of Saudi Arabia, i.e. when the House of Saud shock its body, so did OPEC, the tail (OPEC) NEVER wagged the dog (Saudi Arabia).

Norway NEVER joined the EURO, and its oil production is in decline (Through NOT as severe as was the British drop of Oil production from the North Sea not like how Mexico's production has dropped over the last 10-15 years), but Natural gas production of both Norway and Britain from the North Sea is up).

Thus it is Russia and its ally Kazakhstan whose this is aimed at, i.e Putin, but is Putin willing to work with Saudi Arabia, given his support for Iran, Iraq and Syria over the House of Saud?

It sounds like Saudi Arabia wants the price back up, and to do so it needs the cooperation of Putin (Or the rest of OPEC wants the price up, and to do so against the wishes of the House of Saud, means they need the help of Putin).

Interesting ploy, how it will work out is as interesting, an OPEC with Russia as the "Swing Producer" would turn OPEC from being pro-US to anti US quickly.

[FBaggins]

2. Why does it matter?

OPEC clearly understands that all that matters here is total production as it compares to the demand curve. It doesn't matter a bit whether that production cut comes from a country that is not a net exporter.

[happyslug]

3. Saudi Arabia replaced Texas as the "Swing Producer" of oil in the 1970s

From the 1920s to 1969, the Texas Railroad Commission determined the world wide price of oil by setting how much oil would be produced in Texas. If the price was to high, Texas oil production was increased, if the price was to low, Texas oil production was decreased. The rest of the world followed what the Texas Railroad Commission did (and in the period 1865-1912, this was done by Standard oil).

Since the 1970s the role of "Swing Producer" i.e the entity who can reduce or increase its oil production and that reduction or increase would set world wide oil prices had been Saudi Arabia. They lost it about 2002 and thus we saw the steady increase in the price of oil from 2002 to 2008, then a drop then a stabilization around 2010, then another drop. Russia's production equals Saudi Arabia Production, but Russia decided it needed the money so refused to join OPEC or cooperate with OPEC. Russia thus made out like a Bandit.

What is happening now is the price became so high, people stop using oil. This plus the input of a huge number of marginal wells produced the present glut. For reasons I believe has to do with the battle over who will rule Saudi Arabia, the House of Saud is presently unable to reduce production (To many of the third generation after King Saud I, who died in 1952, are fighting to be the first of their generation to rule Arabia, thus NONE of them are willing to take a cut in money).

Thus that leaves Russia as the only producer, who can cut back production to stabilize world wide oil prices. No one else can do it for all of their production is to low (or cost to much to produce). Thus this may be a plead made in desperation, the House of Saud can NOT save the price of oil, that leave Putin as the only person who can do so. The real question will he do so? He needs foreign currency but he has enough internal support to withstand demands for those foreign goods. It is costly to be the Swing Producer, when the price is high, you have to forgo those profits, and when the price is low, you have to cut production even as you lose more money. It is costly to be the swing producer, thus the Texas Railroad Commission did it for decades as a government function. The House of Saud did the role of Swing Producer for decades but is refusing to do so at the present time, thus the rest of OPEC has to look to the other main oil exporter and that is Russia under Putin.

[FBaggins]

4. And now they want someone else to be the swing producer

They don't care whether or not that's an exporting country. In fact, by all reports they hope that it will be the U.S. that cuts production.

What is happening now is the price became so high, people stop using oil.

Nope. What is happening now is that prices became so high, a number of other producing nations ramped up more expensive (but still profitable at those prices) production... until there was a glut.

Thus that leaves Russia as the only producer, who can cut back production to stabilize world wide oil prices.

Again... that incorrectly assumes that it makes any difference whether the producer(s) who cut their output need to be exporters. That simply isn't the case.

As for the Saudi speculation, that doesn't match either the reporting on the other data. Saudi production is well above the average of recent years (and millions of bpd above just a few short years ago). They pretty clearly signaled their intention to drive prices down to push out the higher-cost producers. If they were unable to take a cut in money... then they would have cut production... because their production is high enough that they would still make more money on the remaining bbls. If they, for instance, announced a 2 mbpd cut today, the price would quickly rise more than 25%... giving them more cash on their remaining 6+mbpd of sales and an extra 2mbpd that can go into storage or be shut in for later.

Re:Russia... there's some indication as well that part of the policy shift was targeted at Russia's economy (through US diplomatic efforts to pressure Russia while Obama is more than willing to put some pain to the US fracking producers). Yet Putin is less than likely to do US Frackers a favor by getting out of their way.

[happyslug]

5. And that is typical of a bubble.

Last edited Wed Apr 15, 2015, 10:56 AM - Edit history (3)

US Oil consumption peaked in 2007 at 20,680,000 barrels a day and in 2013 was only at 18,961,000 barrels per day:

http://www.eia.gov/countries/country-data.cfm?fips=US#pet

http://www.eia.gov/countries/country-data.cfm?fips=US

China's oil consumption has increase but at just over 10 million barrels a day usage in 2013 (latest year of data) is well below the US level for the same year (18 Million barrels a day).

Rig counts are WAY DOWN. This has NOT had an affect on oil PRODUCTION at the present time (Production of oil in the US has increased), but it is expected to affect production by late 2015. There are 988 rigs in use in April 2015, compared to 2031 in the first week of September 2008.

Oil rigs are down to 760 compared in 1609 in October 2014:

http://www.zacks.com/stock/news/170521/us-rig-count-falls-below-1000-42-more-oil-units-idled

Eagle Ford, the Texas "Tight Oil" field peaked on a per well basis in 2012, thus in 2013 you started to see more and more wells being drilled that would produce less oil than older wells (This is typical, people tend to drill the wells that have the most oil first, and then go after the smaller wells). :

http://www.eia.gov/forecasts/aeo/tight_oil.cfm

These wells start out fast, but quickly dry out, one well drilled in May 2014 saw a drop in daily production of 69% in the first year of production:

http://www.bloomberg.com/bw/articles/2013-10-10/u-dot-s-dot-shale-oil-boom-may-not-last-as-fracking-wells-lack-staying-power

Worse the "Sweet spots" are the first to go:

For example, whereas 1,092 additional wells were needed to increase production from 300,000 to 500,000 b/d, a simple replication of this drilling volume was insufficient to deliver the next 200,000 b/d of production growth.17 Instead, a total of 1,554 additional wells were needed to bring production from 500,000 to 700,000 b/d (representing an increase of 462 wells, or 42%, over the previous increment), and a yet-greater number, 1,736 additional wells, was needed to take production to the 900,000 b/d mark (representing an increase of 182 wells, or 12%, over the previous increment).

Read more at: http://carnegieendowment.org/2014/11/01/tight-oil-in-united-states-recent-developments-and-future-financial-sustainability

i.e. it took more wells to produce LESS oil as the oil field was opened up for new wells.

80% of all wells in the US are "Stripper wells", wells that were drilled years ago and still produce very small amounts of oil. Often pumped once or twice a month, then capped to leave any oil sip into the well head to be pumped when it is thought enough oil has sipped into the well head to justify pumping the oil out. 13.2% of US Oil production is from these wells:

http://www.energyandcapital.com/articles/the-life-of-an-oil-well/2437

On a per well basis, both Eagle Ford and Bakkan are in decline (but each has increased TOTAL oil from both, the decline is on the per well basis):

http://www.ogj.com/articles/print/volume-112/issue-11/drilling-production/new-well-productivity-data-provide-us-shale-potential-insights.html

Several people have pointed out the present Tight Oil (Shale Oil) boom is a bubble and is about to break, and when it break the US will have lost a real chance to become energy independent:

http://www.newsweek.com/2014/07/18/how-long-will-americas-shale-gas-boom-last-260823.html

In simple terms, Tight Oil (Shale Oil) is a one time deal, it has a short life span, when after about five years each Shale Oil Wells joins the 80% of oil well as a stripper well, producing a couple of barrels every month. Yes 20% of all OIL WELLS in the US produce 86.8% of the oil produced in the US. With Shale the number of wells actually producing large quality of oil will boom and then decline (As Shale wells are drill, then peak in about 18 months, then go into decline so that they are just stripper wells after about five years of drilling).

The present low price for oil is being caused by the massive increase in Shale Oil Wells still in production. Remember peak new drilling was in October 2014. Given the peak rig count was in October, the wells drilled in that month only started to decline in October. If the pattern holds as it has in older wells, the production drop is only starting to hit now, as the rig count go down even further.

It is NEW WELLS that bring in NEW oil sources, but older wells also produce oil, and that includes wells drilled since 2010. The wells drill in 2010 are probably becoming stripper wells today, but later wells are either producing close to peak or on their slow decline after hitting peak production for that well. This means even more oil coming into the market and with it lower price for the oil.

This is complicated by the high costs of Drilling these wells, but the low cost of producing the oil from the wells. The oil from those wells can NOT pay for the cost of drilling the well, but it can pay for pumping the oil (and if you can NOT maximize profits, you minimize loss).

Thus the price of oil for the next year or so will continue to drop. By the end of 2015, with the reduced rig count AND the need for more wells to replace the higher production wells of today, this can end by the end of 2015, but most people are putting it in 2017. Prices will continue to drop till the cost of pumping the oil drops below the price for oil, then production of the high price oil will stop and the price stabilize and start to go back up.

OPEC members are expecting the above, that US oil production will NOT drop because of Government action, but the price of oil will drop to far. That is NOT what OPEC wants, they want someone to take charge and cut their own production when the price of oil gets to low. Since the 1970s that has been the role of Saudi Arabia, but Russia can also fulfill that role, providing Putin is willing to take the costs involved (Which includes Saudi Arabia getting more money for its oil, i.e. more money for Al Queda and other radical groups out of that Sunni Safi tradition).

I do not know if Putin is willing to do it, he can but that means less money for Russia at times of price drops. I suspect Saudi Arabia is unable to do it, for it needs the money to pay for its Undeclared war with Iran (and the current ongoing internal struggle over who will be in charge when the grandsons of King Saud I take over from the Sons of King Saud I). Iran can not do be the swing producer, its production of oil is to low compared to Russia and Saudi Arabia, but it can support Russia doing being the Swing Producer. Kazakhstan has no choice in the matter, it will do what Russia tells it to do. Only time will tell if Putin is willing to became the new "Swing producer" of oil.

[Nihil]

6. Side comment: You should be even-handed with your labels ...

The appending of "well known cheater" is also applicable to numbers 1, 3 & 4 on your list
(as a bare minimum) - big-time on #1.

[happyslug]

7. OPEC can stand for Oil producing exporting CHEATERS.

There is evidence every member of OPEC is or has cheated in the past, I just mentioned one that well known for it and gets blamed for it more the the rest.