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OPEC no longer an oil club with clout

Monday, February 20, 2017 11:25
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Some investors may be old enough to remember the oil crises of 1973-74 and 1980-81. Back then an enraged Organization of Petroleum Exporting Countries, accused emotionally by many of being a cartel, ramped up oil prices globally, creating an energy crisis in the West.

Russia, or the Soviet Union as it then was, was immune from the oil price shock as it ran an internal market for itself and its Socialist allies.

Fast forward to 2017. It’s almost becoming a stand-off but the oil industry is being tested by one non-OPEC producer ramping up output at the first sight of higher fuel prices. What is more, it appears to have at least as much price clout as OPEC once did.

Even before President Donald Trump has given to go-ahead on ambitious infrastructure projects which will benefit commodity prices and drive up demand for fuel as part of that production line, the United States is already determining prices. Only its actions appear to be depressing, nor raising, prices.

OPEC had to act, shows Saudi Arabia

After two years of oil price recession, Saudi Arabia has been so squeezed that it has decided that taking on the nascent US shale oil industry by driving oil prices south was an expensive mistake. In 2016, for the first time in a decade, “hard up” Saudi Arabia had to borrow from international credit markets.

By November, the largest player in the OPEC club had managed to get its colleagues to agree terms for a supply cull that would help raise oil prices.

The International Energy Agency said earlier this month OPEC has achieved a record 90% initial compliance with its output accord agreed last fall.

Saudi Arabia reduced output in January by even more than to which it had committed, according to both the IEA and to what the kingdom told OPEC. Eleven non-OPEC members who joined the agreement, including Russia, have made about half their pledged cuts, the IEA said in its monthly report on Feb. 10.

But now hard-pressed US oil producers have taken the £2 a barrel price rise since the start of February as a chance to raise output, thereby suppressing the good intentions of OPEC.

According to the weekly Baker Hughes oil rig count, 597 rigs are now active in the United States, its highest tally since October 2015. That followed five successive weeks of gains in rig additions.

Official data from the US government backs up the worrying evidence of supply largesse.

US crude inventories climbed to 518.1mln barrels in the week ended Feb. 10, the highest level in weekly data going back to 1982, according to the Federal government-owned Energy Information Administration.

What is more, experts reckon that the rises will carry on for another 12 months at least.

For now, investors are just about calm that OPEC is taking this supply stem so seriously, more than it has ever done before.

The US oil price gauge, the West Texas Intermediate, was up 0.5% to $53.64 on Monday.

But if US supply continues to burgeon, the risk is that some nations who need hard currency desperately such as Iran and others who were at best lukewarm to the supply cuts in the first place, will decide to throw in the towel and carry on producing above quota. That will bring oil prices back down – and dragging everyone to the negotiating table next time around could prove a whole lot harder than it was this time.

Story by ProactiveInvestors


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