OPEC'S SEPT. 28 DECISION to cut oil production came as somewhat of a surprise to most of us since there was no advance notice of the move nor was there any indication in previous meetings over the past two years that the 14-member organization had any intention of backing down in its effort to undermine US shale producers. Although it was a pleasant surprise that we hope will help prop up oil prices, no one knows how long it will last. There are 14 nations in OPEC, and all of them need to be on the same page.
Traditionally, Saudi Arabia had assumed the role of swing producer and would adjust its production up or down in order to balance markets. Clearly, the Saudis wanted to relinquish this responsibility and hand it over to North American producers, who are obviously not part of the cartel. After all, the Saudi thinking goes, it is the Americans who introduced all this new oil from unconventional resources into the markets. Let them adjust their production levels.
In a face-to-face confrontation, it was the American producers who blinked as prices plummeted. More specifically, it was independent producers who had no choice but to cut production or fail. Only now are US producers starting to adjust to this new reality by cutting back on drilling and production in response to falling oil prices.
Now that US producers have responded to the low price environment by curtailing production, OPEC ministers have agreed to cut production as well. Beginning in November, the cartel will reduce production to about 32.5 to 33.0 million barrels per day in contrast to their August output of roughly 33.3 million barrels per day. More details will be known about the cuts after OPEC holds its next general meeting in Vienna on Nov. 30.
Over the past few months, WTI and Brent crude prices have moved closer together as they have stabilized at between about the mid $40s to the low $50s. This has been beneficial for producers globally and made drilling and production more economic. At this writing, NYMEX oil futures are trading at $46.86, and Brent is $49.71 - less than $3 apart. Natural gas is $3.02.
Speaking at the World Energy Congress in Istanbul in mid-October, just a few weeks after agreeing to cut supply for the first time in eight years, Saudi Arabia's energy minister said that oil prices could recover to $60 a barrel by the end of the year. This contrasts with Goldman Sachs, which recently cut its fourth quarter oil forecast price to $43 - down from $50. It will be worth noting which of them is closer to the mark on Dec. 31.
There is too much uncertainly to say now with any certainty what the price will be. The Goldman analysts say they expect a ramp-up in production from Kazakhstan, Russia, and Canada. Iran has said that it wants to continue raising production after international sanctions were eased earlier this year. And, of course, US operators - especially those in the Permian Basin - are gearing up to drill more wells, and other North American producers are looking to complete wells already drilled. Unless there is a significant increase in demand, it appears likely that oil prices will fall again once all this extra supply hits the market.
Bloomberg reported recently that at least 10 oil tankers were waiting in the North Sea to offload their cargo, a sign that the European market for Brent crude remains oversupplied. Typically, no more than one or two tankers are anchored while waiting to transfer their cargo. Elsewhere in the world, including the Port of Houston, oil tankers are still being utilized as floating storage tanks rather than being offloaded.
It's not as if global energy demand has fallen. It simply isn't increasing at the same rate it has grown for the past decade or so. Both developing nations and developed ones are utilizing a more diversified energy mix than ever before, including renewables. Cars, trucks, appliances, and households are also more energy efficient than they were 10 years ago.
A new report from the World Energy Congress reveals an "unexpectedly high growth" in the renewable energy market in terms of investment, new capacity, and high growth rates - especially in developing countries. The WEC went on to say that this has contributed to falling energy prices and the increased decoupling of economic growth and greenhouse gas emissions.
The total global renewable energy power capacity has doubled within the last 10 years, from 1037 gigawatts in 2006 to 1985 gigawatts at the end of 2015. This has been caused by the record deployment of wind and solar capacity for power generation. Renewable-based power generation today represents 23% of total worldwide power generation, and renewable energy growth continues to outpace all other forms of energy, including coal, nuclear, and natural gas.
Christoph Frei, secretary general of the World Energy Council, noted that this growing shift towards renewable energy has the potential to cause significant stress among energy producers and users and could upset global economics and create geopolitical divisions among the various parties. He added that this will need to be part of a broadened carbon and climate dialogue.
For oil producers that are feeling the squeeze, this is not the conversation they want to have.