OPEC cuts fail to impress
Over pas decades OPEC - self-described as a cartel - has managed to manipulate energy prices through orchestrated production cuts under the guise of "maintainging price stability". However, its loss of relevancy in the world market has accelerated, outpacing all forecasts. How on earth did that happen? Well, OPECs control of oil supplies is a thing of the past due to various factors.
Usually, when OPEC wants to increase the price of oil the cartel just asks its member countries to cut down production. As a result, of course, the oil price spikes and everyone associated with OPEC laughs all the way to the bank. Then, finally, the day dawned when OPEC struggled to get 50% compliance from members regarding supply cuts- except Saudi Arabia and Kuwait, that is. Then quietly on the sidelines, Russia, which isnt a part of OPEC, overtook Saudi Arabia as the worlds number 1 oil producer. OPEC members inner trust irreversibly fell on the wayside.
Now, did the egos fall and crash too? OPEC was aware of losing ground and hastened to cut deals. This year, OPEC and few non- OPEC producers settled to reduce production by 1.8 million barrels per day. In particular, OPEC sitting to bargain with Russia was a sweet sight for sore eyes. We know how hard Russians are at bargaining. What did OPEC give in return? Probably the Moon.
OPEC, to put it kindly, is in dire straits. Ironically, OPEC has only itself to blame. When the shale wave hit the US, OPEC faced serious insecurities. Easier way would have been to eat a pot of ice cream and concentrate on their business. But we are talking about OPEC. Vigorous oil production in the US is OPECs worst fear. OPEC planned to carpet bomb the shale oil boom in the US by flooding the world market with cheap oil, causing oil prices to drop to a level impractical for shale producers. Of course, there were reverberations on the US shore. From job cuts to bankruptcies, US saw it all. Oil went below the $30 mark and oil production slowed down too. What OPEC didnt count on was the rebound and stabilization that happened faster than expected. Many oil companies hibernated through the storm and weatherd it. Others acquired struggling producers and got just bigger and stronger. Also, shale extraction got - relatively - cheaper with advances in automation technology. For the record, drilling has picked up, the rig count has increased and the US is building Keystone XL. So, going forward the US will depend even less on OPEC. Furthermore, crude production in the US is all set to grow by 360,000 bpd in 2017 and increase to 1 million bpd in 2018. That must have dropped a few jaws OPEC-side.
Irreversibly OPEC is losing its hook on how oil prices behave. When it announced production cut for the first six months of 2017, oil would have breached the $80 mark under 2014 market circumstances - but under 2017 market circumstances, oil prices barely reacted.
Unsurprisingly - if not out of sight - the most hurt has been OPEC countries more than western economies. All OPEC nations are in dire need of funds to balance budget and avert the unrest of populations dependent on state welfare fueld by high oil prices. The initial cuts in early 2017 are losing steam and support. Financial markets see that and this is priced in.
As we have explained, crude oil prices now trade as any other commodity, based on supply and demand. For 4 decades OPEC has managed to control the supply and prices but this is now over. OPEC is the proverbial boy who cried wolf and today no-one pays attention any longer.
President Trump makes due on energy promises
For the US to grasp the much sought after freedom from imported oil, it needs to increase domestic oil and gas production even more. The other way is to enable a drastic and sudden increase in oil prices so that the oil companies earn profits and drill more. Still, more production also means more supply and lower prices. Then the oil companies will run on loss and stop drilling, which will ultimately reduce production. Which bring us to the question, which way will, the man of the moment, President Trump go? We know that he is a friend of fossil fuels.
With regard to energy, he had promised to cut taxes and ease environmental regulations so that the US would enjoy an energy boom. Some argue that regulation costs are bit too small for oil companies to make any visible changes. Considering how the previous administration was adamant on cutting drilling on Federal lands with strict policies on fossil fuels, the present administration is a contrast in study. Already, President Trump has signed executive orders paving way for completion of Dakota Access and Keystone XL oil pipeline. Similarly, there are other pipelines that would see the light of the day, thanks to Trump. Thus, much needed infrastructure is coming into place. The job plan of Trump to bolster infrastructure has made a definite start, so. Also, pipelines are more environmentally friendly and safe than truck or shipping than current rail.
US still imports about 7.9 million barrels of crude a day. As you can see, energy independence is still some time away. Far yet so near. And, when the oil boom is unleashed, as Trump has promised, well see another spike in oil and gas drilling. Of course, the rig count and oil production has risen.
Recently the President also signed the Energy Independence executive order that, apart from providing solid support to the coal industry, seeks to undo many of the Obama-era climate change regulations. Goodbye regulation, hello progress. So, the ban on coal leasing on federal lands is gone. Rules governing methane emissions from oil and gas production have been relaxed. The Clean power Plan that requires states to cut carbon emission is out the window too. The immediate implications? Job creation in the coal sector is definitely debatable simply because natural gas is more easily available and is cheaper - in short natural gas has already supplanted coal, is here to stay, and Federal regulation cannot change that.
On course, lower oil prices and energy security.
Gasoline on the horizon
This summer, a robust demand was expected for gasoline because of more drivers on the road. However, the anticipated seasonal spike in gas prices didnt happen in March. In fact, for the first time since 2009, the average price of gasoline was cheaper than on February 15 when, historically, gasoline prices hit the lowest.
With spring, gasoline prices did increase with the demand. The average price increased by 8 cents gallon compared to March. The present price is the highest since September 2015.
Thanks to fracking, oil production in the US has been soaring. By and by, cost of shale extraction continues to get cheaper. Despite cuts by OPEC and Russia, U.S. oil supplies have grown by leap and bounds. As we mentioned earlier, by 2018 US crude production will hit a million bpd. The recent attack on the airbase in Syria by the US does raise eyebrows as Syria lies just next to Iraq, OPECs second largest oil producer. That said, the strike was on a single airbase and Syria role in oil production is nil. So, the spike is shorter. The same goes for Libyas Sharara oilfield that was shut down for reasons yet unknown. On a world stage, the shutdown isnt big enough to cause visible changes.
At a time when OPEC is struggling to receive compliance from member countries, the picture of oil in the US is brighter and will remain so for years to come. Even if OPEC extends production cuts beyond June, world crude prices will remain low. Of course, the once upon a time powerful cartel fell into the grave it dug for the US. The big question remains, will it creep out?
To sum up: Imports from Canada has risen along with domestic oil production, supply is steady, stockpiles are brimming with oil, drillers are adding rigs, so going forward we forecast oil prices to oscillate in a narrow band.