OPEC’s Days Are Coming To An End [Seadrill Ltd, Transocean LTD, Chevron Corporation, ConocoPhillips]

I’ve discussed both of these fronts several times, but my meetings have indicated an increasing urgency in the tone in which they are addressed.

Asia is now rapidly becoming the biggest target for oil (and other energy) exports worldwide. That trend will be increasing in an uninterrupted curve through at least 2035. Saudi oil exports have been dominant in the region, with Asia regularly paying a “premium” above rates for the same Saudi oil delivered elsewhere in the world.

But now the Russians have moved in. With the opening of an historic East Siberia-Pacific Ocean (ESPO) export pipeline, Moscow has begun to move crude of better quality than the Saudis export to Asia, at discounted prices.

Riyadh first cut the price to Asian consumers in a direct confrontation with the Russians. And by refusing to allow an OPEC production cut last week, the Saudis are deliberately trying to reduce the price globally. At $70 a barrel, crude oil prices are a full $15-20 below the level needed in Moscow to balance its budget.

But don’t worry; Russia is not going to collapse either. It also has ample reserves, and recently allowed the ruble to float. Yet MinFin (the Russian Ministry of Finance) does acknowledge that the country will fall back into recession as early as the first quarter of next year.

Monday’s announcement that Moscow would scrub a $32 billion natural gas pipeline through Bulgaria (South Stream) in favor of an as yet to be negotiated venue through Turkey is an indication the Kremlin needs to make energy revenue adjustments.

Asia, however, remains the primary prize and the main point of contention between OPEC and Russia. Officially, Putin is pledging his support for the OPEC production move (since it has no impact on Russian production levels), but privately Russian officials are fuming.

The Saudi Oil Price War Won’t Change America’s Winning Hand

Finally, there is the factor drawing the most attention by the talking heads on TV. By keeping the price low, Saudi Arabia is also attempting to stifle tight and shale oil production in the U.S.

But as I’ve noted on several occasions, that only has an indirect effect on global oil prices. OPEC can only impact the American market by what it exports there, and only in that way does it have any effect on world pricing.

There is a straightforward reason for this. U.S. producers are still prohibited from exporting most types of crude. Unfortunately for the Saudis, that is about to change, creating very direct consequences on broader pricing from U.S. production.

American crude exports are coming and there are two related components here. There are now plenty of excess recoverable reserves in the U.S. So exporting would have no effect on already declining prices in the domestic market. That removes the primary political objection to U.S. exports.

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