The last time the Organization of Petroleum Exporting Countries (Opec) met, it wanted to send a message to oil producers that weren’t cartel members: cut it out. The members of the world’s most powerful energy club are likely to allow themselves a congratulatory smile when they meet again on Friday. The message was received.
At Friday’s meeting in Vienna, Opec is widely expected to keep its production quota at 30m barrels a day, a level set when Opec last met in November. At the time, crude-oil analysts said the cartel was launching a price war for global market share with non-Opec members, namely US shale-oil producers. Opec’s move worked but the competition is still snapping at its heels.
Crude-oil prices tumbled after November’s meeting, with values for the global benchmark, Brent, falling to about $50 a barrel in January from a high of about $115 in June 2014. The US standard, West Texas Intermediate (WTI), fell to about $45 in January, from a high of about $106 in June 2014.
Fast-forward to June and it seems Opec got what it wanted. US production growth is slowing as the number of crude-oil rigs has fallen, and Opec managed to incrementally increase its market share to 33% as of April, from 32% in mid-2014, according to a research note from Barclays.
Crude-oil prices are also higher since early 2015, around $65 a barrel for Brent and $61 for US WTI, on a combination of a slowdown in US oil production growth and a US dollar that has tempered its own strength. Because crude oil is denominated in dollars, a stronger buck can weigh on values.
But that doesn’t mean Opec is back to solely determining the direction of the oil market, crude-oil analysts said.
“They want to keep the price low enough to keep US shale-oil producers from producing,” said Charles Nedoss, senior market strategist at LaSalle Futures Group. “They’re dealing with something they’ve never dealt with before, the fact that someone else can step-up production.”
The US oil boom means Opec is under pressure to retain its production quota if it wants to build market share and keep US producers reined in.
Michael Loewen, commodity strategist at TD Securities, said Opec members will likely say they are justified in standing pat because demand is picking up, which is what Opec has said for the past few months.
Loewen said internal demand in Saudi Arabia and the Gulf states is higher, and the summer driving season in the US is under way, normally a time of higher use. Although US gasoline prices are above where they were a few months ago because of higher oil prices, with a national average price of $2.75 a gallon, they’re still nearly a $1 a gallon cheaper than a year ago, according to AAA.
Still, slightly greater demand is not going to eat into the slush pile of crude oil. Global supplies continued to exceed global demand by more than 1.5m barrels per day in the second quarter, Barclays said. Some of the excess comes from Opec members producing about 1.3m to 1.5m barrels a day above their production quota, Loewen said.
If Opec sits tight, crude oil prices will stay around where they are, Nedoss said; if it announces a cut to the quota, then oil prices could spike higher. Any significant price rise would be temporary because it could signal to US producers to go back to pumping more oil, he added.
The odds of an Opec quota production cut is “tremendously low”, Loewen said
Tim Porter, energy analyst and portfolio manager at Reaves Asset Management, said US producers need $75 a barrel to expand production. Some companies still drilled oil wells even as prices fell, but they did not put the wells into production.
“Those would be easy to tap,” he said, if prices rebounded on an announced Opec production cut.
US shale-oil production growth has slowed, but an outright decline has not shown up in data yet, Porter said. As of the end of March, the US Department of Energy said the US produced 9.5m barrels of oil per day in 2015 versus 8.25m barrels daily in March 2014.
“We really haven’t see the drop in the US production and probably won’t until the end of the year,” he said.
There’s a small chance Opec could raise the quota to match what the cartel is actually producing, Loewen said.
If that’s the case, Nedoss said oil prices would fall, but probably closer to $55 a barrel for WTI, rather than going back to the lows set in January.
“If they hike the quota, prices will fall, but that will just encourage demand so prices won’t stay low,” he said. “I see prices holding between $55 and $65 a barrel (for WTI) for a while because Opec can’t do anything. What else can they do? They have one hand tied behind their back because of US producers.”
