The OPEC picture is multifaceted: the Russians and Saudis are together; they hold some cards, have some control.
The Venezuelans and Iranians are hurting; sanctions condemn them to the bottom. Add supply cuts, strong demand, stubborn price thresholds/ceilings, and shale, and it is trouble all around. The canvas is a kaleidoscope of clashes; depending on the outcomes, this could be good (or disappointing) for a hovering Guyana.
According to a June 30 article in Bloomberg titled, “Shale fight makes OPEC accept lowest market share since 1991” it was noted that the co-leaders of OPEC, Russia and Saudi Arabia, have agreed to extend supply cuts until March 2020. Nine months is an eternity in the oil world. Amrita Sen, chief analyst at consultant Energy Aspects Ltd, had this to say: “For Saudi Arabia, the oil policy right now is 100% revenues, but if inventories don’t fall, and prices don’t rise the policy is not sustainable.”
The problem for the Saudis is manifold: prices not cooperating ($85 minimum needed); cuts are not what it agreed to (600, 000 barrels per day more); its inventories are not falling; and its market share is not growing (could be lowest in 30 years). The policy decision to “sacrifice market share to lift prices” is not working. Conflict with Iran, with the ensuing tanker dangers, looms as a tempting incentive; by itself, Iran is not flinching from confrontation. How much more can that hurt?
Moreover, there is more trouble for the Middle East giant. The Russians could live with a price of $40 per barrel; so, while current prices represent some gravy for its partner, the Saudis are hurting, as they need a price of $80 a barrel to meet budgetary requirements.
Thus, the current ongoing production/supply curbs may not be sustainable. Because as consultant Wood McKenzie suggested: OPEC might be aiming for a price that is too high. More ominously, as Bloomberg noted, “by pursuing that price, it’s boosting not just shale, but deep-water exploration.” That is a worrying part of the oil puzzle. Shale is the gushing devil that undermines menacingly.
But all is not rosy. According to the New York Times (June 30), “U.S Oil Companies Don’t Find Energy Independence So Profitable.” The encouraging news for the Saudis (and OPEC) is that US “companies themselves are finding little to love” not with “a global glut driving down prices.” The article elaborated that in the US, “many are losing money and are staying afloat by selling assets and taking on debt.” However, there is this reserve card: “the US is set to become an even bigger factor because another five million barrels or so of daily crude oil production are on the way in the next few years.”
More supply promised; more downward price pressures possible. Something or some side is going to have to give. The experts forecast that the OPEC supply cuts may have to go into 2021, with the risk of further market share erosion. Mistakes and misjudgments make men mad: they take risks; lash out at competition (and enemies). The Middle East tinderbox and the Straits of Hormuz unnerve.
Trade war, economic slowdown, and softening demand all add to an unpromising mosaic. As indicated by the New York Times, there are “concerns that electric cars and hybrid cars are going to get more popular.” Yet another concern is that “climate change prompts restrictions on environmental drilling or a shift to alternative fuels.” The Guyana government identifies with going green. Foreign investors look for profits.
At the edge of this maelstrom, stands Guyana with its big bag of liquid gold. The timing could be fortuitous, if this country can get its oil business flowing. There are huge expectations, amidst the contradictory (and confrontational) creole chatters. At close to $60 a barrel, that is a sharp shave. Then again, the Saudis can open the supply spigots and drown all comers. Guyanese better learn.
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