So, today all the news related to the oil and gas industry is hovering around OPEC and Russia and their big meeting taking place in Vienna this week. So why is that?
It’s really pretty simple: As market conditions exist right now, OPEC and Russia, thanks to their joint agreement to limit exports of crude oil onto the global market, are basically in control of where the price for crude goes from here. This was not always the case – in fact, it’s a veritable sea-change from just a couple of years ago. Let’s review…
Two years ago this month, no one factor could claim to be the main factor in influencing the price for crude oil, which at the time had been driven down to around $40/bbl due to the chronic over-supply situation that had been allowed to persist since mid-2014. Despite a rig count of around 850 – half of what it had been in mid-2014 – U.S. shale producers were still drilling more wells than they should have been – many in a desperate effort to generate enough cash flow in order to meet debt obligations and avoid bankruptcy – OPEC nations were flooding the market with crude, as were Russia, Mexico and other non-OPEC producing countries. In addition, the U.S. and global economy was experiencing a fraction of the rapid economic growth we see today, and global demand growth for crude was also slower.
With no one in control, attempting to enforce some supply-side discipline in the marketplace, it was essentially the wild west, and the oil-producing members of OPEC, along with Russia were feeling the pain more than anyone else. This was the situation that led the OPEC and Russian/non-OPEC oil ministers to get together in September of 2016 to begin efforts to hash out an initial agreement in principle to limit crude exports based on a quota system.
They met again in November of that year and entered into a final agreement at that time. This agreement was met with much skepticism from analysts, traders and “experts” on oil and gas, which was well-founded given the poor history of OPEC nations’ adherence to quotas in prior export quota deals. Russia also had had a poor history of accurately accounting for and reporting its true export volumes.
But these countries have proved the skeptics wrong – in general, compliance with the quotas by each country has averaged around 90% in any given month. The result has been that, despite the rapid rise in U.S. rig counts and production levels over the last 24 months, the crude price has steadily risen to the $70 target price the ministers announced they were seeking when the agreement was announced.
The result of all of this history is that today, the countries who are party to this export limitation deal are in the driver’s seat in determining what the global crude price is going to be as we move ahead. Thus, each of their meetings is met with great anticipation by the markets, for very good reason, and this week’s meeting is no different. So, pay attention: What they decide is going to impact all of us.
This concludes our Shale ‘Splainer for June 18, 2018.