Saudi Arabia Thinks OPEC+ Is Central Bank of Oil—Fire The Banker!

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Saudi Oil Minister Prince Abdulaziz bin Salman recently said that OPEC+ is the central bank of oil, and that he feels good about the increase in oil prices since April.

I’m glad that someone feels good because the truth is that OPEC+ has done a dreadful job of managing world oil markets over the last three-and-a-half years. Markets have been over-supplied 79% of the time and there have been two major oil-price collapses since production cuts took effect at the beginning of 2017. 

If that’s how a central bank performs, I would fire the banker!

When OPEC+ announced production cuts in November 2016, inventories had already fallen about 25% from peak levels in March of that year (Figure 1). Markets were balancing themselves and didn’t need help from the central bankers of oil.

Because of anticipated cuts, prices increased 20% in November and December from about $45 to $54. Higher prices led to a production surge and inventory builds that contributed to much lower prices by June.

Figure 1. Oil over-supply 79% of time and 2 major price collapses
since OPEC+ production cuts took effect in 2017.
Over-supply had already declined 25% when cuts went into effect.
Source: EIA and Labyrinth Consulting Services, Inc.

To make matters worse, OPEC+ was responsible for much of the over-production that led to the late 2018 price collapse, and was at least partly responsible for the 2020 price collapse.

OPEC+ members ramped up production beginning in April 2018 in anticipation of U.S. sanctions on Iran oil exports. When Donald Trump reneged on those sanctions, prices collapsed to the lowest level since June 2017.

The producer consortium was powerless against Covid-19 and its effect on the global economy, but the group’s failure to reach agreement to continue production cuts at its early March 2020 meeting is what sent oil prices into free-fall. Covid-19 finished the job later in the month.

It is absurd to call what followed a price war because no one was buying any oil with plummeting global demand. President Trump offered Saudi Arabia and Russia a convenient way to save face following this debacle. In April, OPEC+ announced “historical” production cuts of almost 10 mmb/d which formalized what markets had already done for them.

“When they look at prices over the quarter, when they look at green shoots of demand pick-up, I think they feel good.”

Helima Croft, head of commodity strategy at RBC Capital Markets

Prices have increased to about $40 per barrel since the historical cuts in April. So, the latest OPEC+ achievement is a return to the lowest price levels since the depths of the early 2016 collapse of world oil prices.

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Art Berman is anything but your run-of-the-mill energy consultant. With a résumé boasting over 40 years as a petroleum geologist, he’s here to annihilate your preconceived notions and rearm you with unfiltered, data-backed takes on energy and its colossal role in the world's economic pulse. Learn more about Art here.

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3 Comments

  1. OpecIQ on July 16, 2020 at 1:44 am

    Bear with my humble IQ, but Oil prices must take in consideration Comparative Minimum Wages worldwide – the rest is always News Releases, fancy Energy Charts and Economics.

    That’s why no matter how oil and natural gas are down, nations are increasingly unable to run a fridge, electric fan or bulb – despite being highly energy reserves-rich: there is actually no ‘gas’!

    The footage below shows people rioting against the government in Iraq demanding grid electricity to run an electric fan or a bulb – as there is no enough fuel to run the little less than 19GW power stations in the country at summer peak.

    The US generates 700+GW at summer peak (36 folds more power, population only 10 times bigger) – in comparison.

    Game-Theory is actually a real phenomena – regardless of if parties in it are called OPEC+ or otherwise!

    The real problem is when more nations will not be able to avoid blackouts, owing to oil and n. gas depletion – effectively becoming another war-torn Iraq.

    https://www.youtube.com/watch?v=Ppfcw5KWbOg

    • art.berman on July 16, 2020 at 2:30 am

      Opec,

      Oil markets (which are everyone) focus on supply and the price needed to either cause more or less drilling. Comparative minumum wages are largely unknowable since most countries don’t have them.

      Electric grids do not generally run on oil but rather, coal, natural gas, nuclear or hydro sources. I, therefore, disagree with your thesis that electric power generation is clearly connected to the price of oil.

      The root of most civil unrest is the cost of living and much of that is connected to energy prices indirectly since higher energy costs increase the cost of basic living needs.

      Oil prices are not negotiated or dictated by any organization or regulatory body. I ridiculed OPEC in my post for imagining itself to be such a body. Oil prices are as organic as any other commodity prices in the world albeit greatly affected by the financialization of all commodity markets today.

      All the best,

      Art

  2. OpecIQ on July 16, 2020 at 1:36 am

    Bear with my humble IQ, but Oil prices must take in consideration Comparative Minimum Wages worldwide – the rest is always News Releases, fancy Energy Charts and Economics.

    That’s why no matter how oil and natural gas are down, nations are increasingly unable to run a fridge, electric fan or bulb – despite being highly energy reserves-rich: there is actually no ‘gas’!

    The footage below shows people rioting against the government in Iraq demanding grid electricity to run an electric fan or a bulb – as there is no enough fuel to run the little 700GW at summer peak (36 folds more power, population only 10 times bigger) – in comparison.

    Game-Theory is actually a real phenomena – regardless of if parties in it are called OPEC+ or otherwise!

    The real problem is when more nations will not be able to avoid blackouts, owing to oil and n. gas depletion – effectively becoming another war-torn Iraq.

    https://www.youtube.com/watch?v=Ppfcw5KWbOg

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