For those hoping that the recent brief dip in Brent crude below $50 – most notably Venezuela’s intrepid socialist leader Nicolas Maduro whose numbered days get shorter with every day Brent closes red, and countless bondholders of junk- debt capitalized shale companies – would mean that Saudi Arabia’s vendetta against OPEC would finally be put on hiatus, we have bad news: the vendetta just wen nuclear because as Reuters reports, there is “no chance of OPEC output cut.”
As Reuters further adds, Saudi Arabia and its Gulf OPEC allies are showing no sign of considering cutting output to boost oil prices, despite Brent’s dip below $50 a barrel this week, where it is surely headed once again in the coming days. More:
Those misgivings have grown with a slide in oil prices to below half their level in June, hurting the economies of OPEC’s smaller producers. Benchmark Brent dipped to $49.66 on Wednesday, its lowest since April 2009, before rising to $51 on Thursday.
OPEC has forecast an increasing surplus in 2015, citing rising supplies outside the group and lacklustre growth in global demand. But the Gulf members, who account for more than half of OPEC output, are not wavering, arguing lower prices will slow competing supplies, spur economic growth and revive demand.
One delegate from a Gulf OPEC member said there was “no chance” of a rethink while another referred to the view that non-OPEC producers were to blame for the glut. “Naimi made it clear: OPEC will not cut alone,” the second delegate said.
So as the rest of the non-OPEC crude exporting world blames OPEC, and specifically Saudi Arabia, OPEC, and specifically its oil minister Ali al-Naimi, has said: OPEC will not cut alone, or in other words, as long as shale companies are out there pumping, kept alive thanks to the Fed’s ZIRP policy forcing investors to keep them well capitalized even though bankruptcy may be breathing down everyone’s neck in short order, expect the Saudis to keep pumping at the same feverish pace.
OPEC ministers and delegates have blamed non-OPEC producers such as Russia, Mexico and Kazakhstan, as well as U.S. shale and tight oil production, for the oversupply in the market.
U.S. oil production has surged from around 5 million barrels per day to reach a near 30-year record of more than 9 million bpd over the past six years, propelled by the sudden emergence of shale oil output from North Dakota to Texas.
Ironically, it may well end up as a showdown between the Fed and Saudi Arabia, the former doing everything in its power to keep otherwise insolvent companies well-capitalized, and on the other Saudi Arabia doing everything in its power to keep the cash flow drain as high as possible for High Yield debt-funded shale companies, and daring either the Fed, or rather junk bond investors who are scrambling for any source of yield, to back out.
Considering Charlie Evans’ comments from last night, it will be a long wait on both sides.
How does Reuters know all this? “The OPEC delegates – government officials representing their countries who attend OPEC’s meetings – spoke to Reuters after oil’s brief fall below $50 on condition of anonymity as they are not authorised to speak publicly on the issue.”
The question is which OPEC, considering the cartel is now officially split in two, with high-cost producers forming one camp, and very vocally opposed to their low-cost cartel-member peers. As a reminder, Venezuela, Algeria and Iran need oil above $100 to balance their budgets, according to estimates from the IMF and other analysts, higher than the Gulf members who can tolerate lower oil revenues for years.
Officially, OPEC agreed at its November meeting on keeping its output target of 30 million barrels per day (bpd) – a point the U.A.E oil minister reinforced on Wednesday although African members, as well as Iran and Venezuela, had wanted a reduction.
Iran and Algeria have both since called on OPEC to cut output in the face of the slide in oil prices. A delegate from Libya, one of OPEC’s four African OPEC members, agreed.
“Something should be done by OPEC countries to reinstate its role to stabilize the market, ensuring a fair price for both producers and consumers,” Samir Kamal, Libya’s OPEC governor, told Reuters on Thursday, emphasising he was not speaking on behalf of the Libyan government.
“Or there is no need for it any more, especially if only one country is dictating its strategy while hurting other members.”
Bingo. And since OPEC no longer technically exists with the lowest-cost producers calling the shots, the pain will continue until Brent drops to the lowest marginal production price, somewhere in the mid-$20s, just as previously forecast. At that point not even the most desperate yield-chasers will be willing to continue keeping otherwise insolvent shale companies, solvent. Expect that to take place some time in mid- to late-2015, although considering the epic pace of collapse in the front contract, it may well take place in the next month or two.