OPEC and Russia have agreed to a 1.2 million barrel per day production output cut. World Oil production is just over 100 million barrels per day, so this is a 1.2% global cut. This is about 3% cut for OPEC and Russia combined.
Oil prices went up about 5%.
This seems like it just gives more room for oil produces in Texas and other places. The US oil production appears ready to increase 2 million barrels per day in 2019 and another 2 million in 2020.
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Wasn’t this a power play to set up for a price drop, cutting the legs out from under frackers who have a high up front capital outlay and debt burden after they try to ramp?
A point to consider-not all crude oil is of equivalent value. The composition, process requirements, and transportation issues affect the discount valuation relative to Brent.
The refineries engineered to handle metal contaminated, sulfur bearing petroleum can process Venezuelan, and Canadian bitumen as first-alternate. Venezuela’s production can’t supply the market available for the heavy oil. Canada is limited in expansion of exports by transport to market issues. Combined, they supply sufficient product for a U.S. heavy crude market. Essentially, few other countries have developed any real capacity to process this product.
The current tight-oil shale production is in excess for domestic refineries to blend and economically process. The majority is exported to European refinery, which have higher capability to achieve economical runs with the very light oil.
West Texas Permian oil is discounted for lack of pipeline capacity to market. With the addition of an exceptional find of oil and gas reported by the USGS, this transportation issue will likely will be remedied. The new field’s reserves alone are reported as sufficient to sustain total current U.S. consumption of oil for 7 years, and gas for 10 years.
Not true. The industry is fracking at about full speed right now and has been for some time. The reason is that oil at $45 a barrel is quite profitable and has been for a year.
The industry isn’t responding to what OPEC or Russia is doing, it is maximizing its revenue by fracking as much as it can. OPEC and Russia are irrelevant unless they want to push oil below $40 a barrel for over a year.
If OPEC and Russia cut then oil prices go up a bit, frackers lock in contracts and just reinvest the profit in more fracking.
If you look at the slope of the barrels/day charts between 2012 and 2014 as well as from mid 2017 to now you can see what US production looks like when the costs to frack are well under the price of oil.
I think that they are holding on to their supplies, pushing prices up to get some more money and hoping that fracking dies in 5-10 years.
So the best case scenario is that they are playing a long game. Doesn’t seem to make sense to me as batteries will be cheap enough in 2030 to compete with ICEs.
Just seems to me that it might be too-little-too-late.
But first, isn’t it extraordinary that the world oil production is today over 100,000,000 barrels a day? It wasn’t all that long ago (the 1990s) that 62,000,000 barrels a day was world production.
Means that a whole lot more cars and trucks and airplanes and ships are chugging about, worldwide. A LOT more. Especially considering that in the last 30 years, fuel-economy of regular passenger vehicles has improved, along with drayage trucks and long haulers. I used to rent “24 foot” box trucks that averaged 5 to 6 MPG fully loaded. Last harvest, the rented truck got over 10 MPG. Nice.
One thing is clear: that vehicles and ships, trains and airplanes are critically important to keep civilization-as-we-know-it working. And they in turn are critically dependent on crude oil being refined.
By comparison, the electric-powered vehicle/airplane/ship/train world is woefully behind. And in some cases (air) almost certainly unlikely to gain parity.
Just saying,
GoatGuy
Like it or not, the price of gasoline has fallen by 40 cents a gallon because Khashoggi was murdered. A certain Kingdom was trying to offset bad publicity.
The main problem with US overcoming this is the built in short duration of the cutback. If there are projects that can reach production before it ends then they’ll benefit but they’ll also be hurt by lower prices after the cutback. Note, if OPEC repeats this then the industry will compensate by speculatively fracking in anticipation.
Totally! I mean, what were SA and Russia THINKING?
And don’t forget that Qatar is leaving OPEC. Or is it UAE? Either way, they will no longer be beholden to cartelized production limits either.
Pretty much. Any OPEC/Russia driven shortage will be overcome by USA’s blooming oil production (and by others).
Cartel tactics work if you are the only providers in town. If you aren’t, you are just giving your business to other.
And with such a brilliant analysis too, Olive!
First, some OPEC members will cheat and exceed their production quotas. Second, this will spur on fracking here to some extent. This means this stunt won’t have as must effect as they desire and it will also lead to a decrease in oil prices after the stunt from where they would have been had there been no stunt. The bottom line is they are just introducing shocks to the world economy that won’t benefit them in the long run.
ha ha i’m first