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Trading Lessons

How Long Does The OPEC Party Keep Going?

Commodities / Crude Oil Jun 28, 2014 - 08:09 PM GMT

By: Andrew_McKillop

Commodities

The 30 Mbd Limit
Temporarily reprieved by Syria, Libya and Iraq oil prices can be kept from falling, or stoked higher by Goldman Sachs and the dwindling band of “oil and energy market maker banks”. These include the now not-so-Teflon market rigging fraudsters Barclays, Deutsche Bank, SocGen, JP Morgan and a small number of others, like BNP Paribas. If you want to know why oil prices are high – ask them.


Don't ask OPEC. OPEC Secretariat official figures as recent as April-May 2014, released before the June 11th OPEC meeting in Vienna, said that: “OPEC member states [conforming to the quota system] collectively produced slightly less than the 30 million barrels/day crude ceiling volume”.

In other words the quota could be rolled over yet again, markets would not be oversupplied, and prices could stay manipulated at triple-digit price levels by the market maker riggers. Prices can stay “comfortably” firm and high. Not for consumers, of course, but who cares about that?

However, the bravado statement from OPEC itself admitted that “unscheduled outages and production losses” in the 11 member states which supposedly comply with the 30 Mbd maximum output target, in May, were running at about 2.5 to 2.6 Mbd. This capacity can come back on line, anytime.

After these outages and for May, OPEC said that the member states complying with the quota system produced a combined average total between 29.9 and 30.26 Mbd.

Then we bring in Angola's production, estimated at an average 1.73 Mbd in May, Libya's struggling and highly variable production however estimated, by the OPEC Secretariat, as “about 0.3 to 0.6 Mbd” in May, and Iraq's slight decline in production, from 3.3 Mbd at end-2013, to 3.1 Mbd in May.

Adding these, we get 5-plus-Mbd, to add to the official but theoretical 29.99 Mbd.

OPEC states likely produced a total of more than 35 Mbd in May 2014. When or if the unscheduled outages are restored to full production, we could raise this capacity as high as 37.5 Mbd. In other words OPEC has no problems overproducing – the same way the market maker banks have no problems rigging markets and frauding anybody they can, until they get nabbed.

Saved by the Intermittent States and Their Yo-Yo Oil Output
As recently as April-May, the OPEC Secretariat's main worry was Libya – returning to full production and driving a big new hole in claims that “the 30 Mbd ceiling” was holding and could hold. The embattled authorities in Tripoli and Cyrenaica's own authorities, in the oil-producing east which also holds the majority of oil export terminals, strike makeshift periodic agreements for restarting fields or reopening oil ports. Overall, the general security situation suggests the likelihood of stable production at levels anywhere near the pre-revolutionary, Gaddafi-era average of 1.6 Mbd, anytime soon, is small but  the possibility of Libyan crude output recovering to around 1 Mbd cannot be ruled out.

In Iraq, security concerns were already heavily weighing on claims, by the el-Maliki government and Iraqi oil ministers at OPEC meetings that Iraq “would soon achieve 4 to 4.5 Mbd” - and would also rejoin the OPEC quota system!  The second is possible – because Iraq's oil production is very likely to stagnate or decline, not increase – but the first claim is pure and simple grandstanding. As I note in several recent articles, there are multiple technical issues which cast serious doubt on whether Baghdad will be able to capitalize on new production from major fields in the south, despite massive Russian and international oil major corporate investment.

The country has overtaken Iran as OPEC's second biggest producer but Iran has every intention of reversing that situation by raising its own output – this is one key reason Iran wants an end to sanctions.

Iran's oil output has been “artificially hobbled” and in no way can be considered stuck at its present rate of about 3.25 Mbd, but sanctions and current technical limits have caused a throttling back at several fields. In January, oil minister Bijam Zanganeh said Iran earned $34 billion through exporting an average 1.2 Mbd of crude oil and gas condensates in the first nine months of the current Iranian calendar year, which began on March 21, 2013. In December 2013, minister Zanganeh claimed that Iran could boost production by 20% to 4 Mbd by end-2014 if sanctions are lifted. Iran has earmarked 1.5 Mbd export sales by late 2014 in its national budget, needing at least 0.3 Mbd extra output.

Prices, Production and Demand

Intrinsically and basically linked with oil production and export supply trends, the oil price is critical.

Goldman Sachs repeats, for anybody who wants to hear, that “new oil” produced outside the OPEC states costs about $80 a barrel to produce. Thanks to the djihadis, a “security premium” of at least $20 a barrel is fine and dandy. Move on now, there's nothing else to hear!

In the case of Iran, for example, oil minister Zanganeh retains an average Brent price of $107 a barrel, for his policy and programmes.  In Iraq the same price-logic applies, but basic security-linked issues such as pipeline and refinery upkeep and maintenance defy that logic. Well before the ISIS invasion, in the north, the security situation was (and is) so bad that repair teams are unable to get close to the key Iraq-Turkey crude pipeline since an attack by insurgents closed the line in early March.

High oil prices work magic. The USA's stunning increase in shale gas and shale oil output bringing their combined oil equivalent total above the oil-only production levels of Russia and Saudi Arabia in less than 6 years, is largely or exclusively due to high oil prices. The shift to “unconventional oil” also operating in the case of deepwater provinces such as offshore Brazil, the GoM and offshore east and west Africa - depends on high oil prices – but the inevitable risk is overproduction.

What we find is longterm and constant non-correlation between prices and production. Backtracking to the case of Iraq we can note that the 1991 Desert Storm-Gulf War I was in part triggered and accelerated by Saddam Hussein's invasion of Kuwait resulting in oil market prices spiking – to about $46 a barrel! In 1998, the UK 'Economist' magazine felt able to forecast oil prices in 2000-2010 falling “to as low as $5 a barrel”. Oil production increased throughout the 1990s.

Oil producer country discipline when faced with seriously declining prices – and seriously limiting output to restore prices – is for the least unsure. Saudi Arabia, in oil lore and myth, has the vaunted role of “swing producer” but when confronted by the oil price crash of late 1986 slashing oil prices by about 67%, Saudi Arabia's “voluntary production cut” held for less than 2 years. By 1989 it had fully restored production to 8.5 Mbd – despite prices staying low, or very low for another 10 years!

Today's oil production context of rising unconventional oil output driven by high prices and easy borrowing for mega-investment projects, and unrealistic claims by OPEC states that they are maintaining total output “at 30 Mbd or below” to safeguard high prices - and an oil demand context that remains lacklustre to say the least – bodes ill for oil prices. To be sure the near-term is influenced by the Iraq crisis, but the erosion of prices nearer to actual production cost suggests that price decline cannot be held off for an indefinite period. The eccentric and outdated OPEC quota system is a bellwether for this change.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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