Baku, Azerbaijan, April 12
By Aygun Badalova - Trend:
On April 17, major oil producers are expected to meet in Doha to discuss an agreement to freeze oil output at January 2016 levels. Despite strongly demonstrated willingness by the most oil producing countries to take measures to stabilize market, the results of the upcoming meeting seem quite uncertain.
Fenner Stewart, Director of Midwest Center for Energy Law & Policy, assistant professor, University of Calgary spoke to Trend about the most likely outcome of this meeting, measures needed to rebalance the oil market, as well as consequences and benefits of these measures.
Stewart believes that ideally, the participants at Doha will agree to a reduction in oil production so that there can be a "clearing of the oil market" (i.e., a clearing of the massive oversupply of oil stored globally), which is the necessary first step in the rebalancing of the oil order.
This rebalancing process has already started, which is represented in markets by highly volatile oil prices, in particular downward spikes that signal to oil producing countries that they must reduce production until the glut is consumed by demand, according to Stewart.
Until this occurs, the price of oil will not stabilize and trade higher, he said.
Adjust to New Oil Order
For any oil producing country that does not have the capacity to both reduce production levels and have a functioning economy, this is only the start of bad news, Stewart said.
When oil prices do stabilize, they will be well below $100 per barrel, he believes.
This is because when oil price hits the target for shale oil production (i.e., about $65), there is a fracklog (i.e., wells drilled but not fracked) in the U.S. that could quickly produce an additional 500,000 barrels per day. Moreover, if present oil companies cannot hold their position in this fracklog, because of low oil prices, new investors will buy it at a discount.
It is very important to understand that regardless of how many individual U.S. private producers go bankrupt due to this rebalancing process, the oil shale supply will not go away, said Stewart, adding that the genie cannot be put back in the bottle.
"'The market' will produce massive supply of "fast-cycle" shale oil (i.e., production capacity that can start or stop rapidly) when the price hits the target. The bottom line is that when shale oil is profitable to produce, someone will profit from it," Stewart said.
"Jeff Currie, the head of commodities at Goldman Sachs, predicts that this "New Oil Order" means that, over the long run, OPEC has been neutralized and the marginal barrel will be dictated by the shale oil market (i.e., about $65). If Currie is correct, and I think that he is, some oil producing states will not be able to avoid internal strife unless they can adapt successfully to lower oil revenues, which are here to stay," Stewart said.
He believes that undiversified petro-states (such as Saudi Arabia, Russia and Venezuela) are likely in for some painful restructuring of their economies-the larger their reserves of foreign currency, the longer they will have to adjust.
"The pain will also be felt by more developed and diversified national economies (such as those of the offshore producer Norway and the oil sands producer Canada), where the cost of production, if extraction technologies remain the same, will be too high for substantial new investments for years to come," said Stewart.
From today's vantage point, without some dramatic political event, it appears inevitable that all oil producers will eventually grasp this reality, and adjust their economies to conform to this New Oil Order, he said.
Faster means better
Coming back to the Doha meeting this week, the expert said the participants need to cooperate and reduce production as a coordinated group, regardless of the pain.
"In a much simpler time, this is precisely what Henri Deterding (Royal Dutch Shell), Walter C. Teagle (Standard Oil) and Sir John Cadman (Anglo-Persian) supposedly did at Achnacarry Castle in 1928. Reducing production as a coordinated group is the only way to clear the oil glut, so that prices can be allowed to stabilize and increase," he explained.
"If oil producing countries refuse to accept this as the best on a menu of bad options, they will pay for it," Stewart said. "It means a longer cycle of over-production at an unacceptably low price in a fool's attempt to beat the market."
"It is a Sisyphean task, they cannot win. Eventually, all oil producing countries will discipline their output. The only other option is to be bludgeoned by violent downward price spikes and market instability. Those that adjust faster, even if they have to do so unilaterally, will likely be better off in the long run," Stewart said.
It is predicted that little meaningful change will occur at Doha, however Stewart is confident that eventually oil producing states will get the message.
"When-not if-they have had enough, they will agree to cooperate, reduce output, and then work to maximize their national revenues for the foreseeable future," he said. "As Deterding, Teagle and Cadman figured out in 1928, and as Rockefeller figured out 50 years before that: when there is too much oil, the oil market needs as much cooperation as competition, if it is to work to the advantage of producers."
Iran's role
While Iran may participate in the upcoming Doha meeting it firmly states that Tehran will not join the oil output freeze plan and will continue to increase export.
Stewart believes Iran is a wild card.
"It is emerging as a new force in oil pricing, since it is used to functioning without oil revenues thanks to the oil sanctions," he said.
"Will Iran forgo the post-sanctions profits to engage in economic warfare with its regional rivals? Who knows. It's possible," Stewart said.