(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, March 10 CERAWeek has exposed all the
contradictions at the heart of OPEC’s attempt to rebalance the
oil market without rekindling the shale boom or conceding too
much market share to rivals.
The oil industry conference in Houston started with a
celebration of higher prices, progress towards drawing down
global stockpiles, and optimism about the outlook for shale
But it ends with the biggest daily fall in prices for more
than a year, fears that stocks are not declining as planned, and
warnings that shale producers could cause a renewed slump if
they increase output too fast.
STAYING IN STEP
OPEC members led by Saudi Arabia have reported nearly full
compliance with output cuts announced last November, though
performance remains very uneven across the group.
Once again, Saudi Arabia has made the deepest cuts to offset
patchy compliance by other members, returning to its hated role
of swing producer.
But OPEC’s rush to increase output before the accord took
effect in January has left the market bloated with crude that
continues to show up in the statistics as tankers arrive in
North America and unload.
The attempt to beat the deadline has made rebalancing harder
and effectively moved the market against the organisation’s own
OPEC enlisted support from 11 other countries to spread the
burden of rebalancing and protect its market share but
compliance from non-OPEC countries has been much lower.
The organisation’s members have been forced to discount
their selling prices to protect their prized relationships with
And OPEC has encouraged hedge funds and other money managers
to believe prices will rise to $60 per barrel or more.
Hedge funds have accumulated a record bullish position in
crude futures and options amounting to more than 900 million
barrels in the expectation that prices will climb.
Hedge funds nearly all expect the organisation’s output cuts
to be extended beyond their current expiry on June 30 to draw
But OPEC and Saudi Arabia have spent CERAWeek warning shale
producers against raising output too much and assuming the
production cuts will be extended automatically.
Saudi Arabia has pointedly warned shale producers that it
will not cut its own output simply so they can grow theirs
(“Saudis tell U.S. oil: OPEC won’t extend cuts to offset shale”,
Reuters, Mar. 9).
Without an extension, however, global oil production would
rise by more than 1 million barrels per day at the start of
June, and oil prices would likely swoon.
PRICES JUST RIGHT
OPEC wants to push prices higher while simultaneously
protecting its market share.
The organisation is trying to find the Goldilocks price --
high enough to boost revenues and keep hedge funds bullish, but
not so high it sparks a renewed shale drilling boom.
The problem is that the Goldilocks range is fairly narrow,
and may not even exist at all in a form that can satisfy all the
interested groups OPEC has tried to assemble in its cooperative
Most estimates suggest the breakeven price for shale, at
which production can be sustained, is currently around $50 or
$55 per barrel. Prices of $60 or $65 are expected to result in a
substantial increase in production.
But hedge funds have already accumulated a record bullish
position with WTI and Brent prices around $50-55 per barrel and
need significant upside potential to keep them interested.
In the meantime, U.S. shale producers have already started
to increase output much faster than was expected six months ago.
And the market rebalancing process is taking more time than
anticipated, as Saudi officials admitted in Houston this week.
Reported stockpiles are not falling as fast as either OPEC or
the hedge funds expected.
OPEC’s hope of shifting the futures market from contango
into backwardation has stalled, with calendar spreads for nearby
months weakening since the fourth week of February.
OPEC, or in reality Saudi Arabia, faces the familiar
dilemma: it can focus on raising prices or protecting market
share, but not both.
This dilemma will be brought into sharp focus in the next
couple of months as OPEC decides whether to extend its
production cuts beyond June despite weak non-OPEC compliance and
rising shale output.
OPEC and Saudi Arabia control only a minority of global
production and cannot prevent development of extra oil resources
outside the OPEC area (other than by crashing prices).
In theory, it might be possible for OPEC to stabilise prices
in a narrow $50-60 per barrel range but it would require
exceptional deftness and a lot of luck.
Previously attempts to maintain prices within a narrow band
in the late 1990s and early 2000s, and again in 2009-2010 were
Efforts to stabilise oil prices have never succeeded for
very long for precisely this reason and it would be surprising
if this time was any different.
In practice, the market will be regulated by prices, which
will keep shale growth in line with demand from consumers.
Prices plunged this week because at least some traders
revised their view on the likelihood of an early reduction in
stocks and a quick rebalancing.
Concerns about the rapid resumption of shale drilling and
the possible re-emergence of surplus production also weighed.
Adding to those factors, the concentration of bullish hedge
fund positions raised worries the trade was becoming crowded.
For all the talk about production policies among the
conference attendees in Houston, prices rather than strategies
still rule the oil market.
(Editing by Edmund Blair)