The Urethane Blog

OPEC’s Reduced Influence

A Desperate OPEC Asks US Shale For Help In Cutting Oil Output

While OPEC has been presenting an optimistic facade in recent months, repeating at every opportunity that the global oil market is “rebalancing” and demand is rising, the oil production cartel made a rare slip today when it addressed what should not be named in public: US shale production. Speaking on Tuesday, OPEC Secretary General Mohammed Barkindo called on U.S. shale oil producers to help curtail global oil supply, warning extraordinary measures might be needed next year to sustain the rebalanced market in the medium to long term. Which is odd because in every other public address by OPEC members, we hear precisely the opposite: that the market is already in a state of “healthy rebalancing” and… the oil production cut which was supposed to last until this past June may now be extended beyond March of 2018.

“We urge our friends, in the shale basins of North America to take this shared responsibility with all seriousness it deserves, as one of the key lessons learnt from the current unique supply-driven cycle,” said Barkindo quoted by Reuters during a speech delivered at the India Energy Forum organized by CERAWeek in New Delhi.

“At the moment we (OPEC and independent U.S. producers) both agreed that we have a shared responsibility in maintaining stability because they are also not insulated from the impact of this downturn,” Barkindo said, referring to a slide in oil prices that spurred OPEC to agree production cuts late last year.


“The call by independents themselves (is) that we need to continue this interaction.”

Some independents… but not all, and certainly not the cash-flush US shale producers.

Which is why it is unclear just how much this “call” by non-shale independents will bother, or even be heard, by shale producers: fundamentally it is all about liquidity and cash flow, and whereas much of OPEC is at or just shy of its all-in breakeven costs (when factoring in government budgets), shale has no problems obtaining funding courtesy of a massive bond bubble, which allows it to keep its balance sheet stocked with cash, even if the cash flow from operations is barely positive. As such, all shale is doing is capturing market share from those OPEC producers who are prohibited from spending more to replenish existing output, something which the overly generous US junk bond market will allow shale to keep doing indefinitely, and at least until there is another sharp drop in oil prices.

Which explains why while OPEC and some other producers, including Russia have cut supplies this year in order to prop up prices, U.S. production has soared by almost 10% this year, driven largely by shale drillers, with shale production surpassing historical highs and reaching new records.

Barkindo also said he hoped that new producers, not just U.S. shale drillers, would join production cuts. We, in turn hope, he doesn’t hold his breath.

Meanwhile, OPEC continues the charade, and on Monday, Saudi Arabia cut crude oil allocations for November by 560,000 barrels per day (bpd), in line with the kingdom’s commitment to the supply reduction pact.

“Demand-supply is returning to rebalance through massive destocking that we have been witnessing of stocks in OECD across regions in a very massive way,” Barkindo said later, speaking to reporters on the sidelines of the conference. “In the past four months alone, we have seen destocking to the tune of 130 million bpd.”

The aim of the OPEC-led cut is to trim the level of oil in OECD industrialized countries compared with the five-year supply average. Barkindo said the stock overhang to the five-year average stood at 171 million barrels in August, against 338 million at the start of the year.


“The speed and pace (of destocking) has accelerated as a result of anticipated and projected demand growth in the second half of 2017 to the tune of 2 million bpd. We are witnessing a fast return to a balanced market,” Barkindo said.

Still, revealing that all the jawboning is hollow, on Sunday Barkindo said OPEC and other oil producers might need to take “some extraordinary measures” next year to rebalance the oil market.

Which naturally wouldn’t be necessary if what OPEC had been saying previously was the truth. It would, however, explain why OPEC is reduced to begging non-cartel members to limit their production, in the process tipping its hand at just how weak it truly is.