T Nation

Upcoming OPEC Cuts

So OPEC will meet imminently to decide whether or rather how much to cut output.

What effect will this have on the price of a barrel?

Will this even make a difference? Lets hear your thoughts.

http://www.offshore-technology.com/news/news47612.html

If it doesn’t this time they will keep cutting until it does.

Interestingly, prices dropped too low for american companies to afford expansion as well, so pushing ahead with that plan would also increase cost as the high price of oil is no longer around to subsidize new exploration and production.

New exploration would saturate the market but the companies would be raising prices to the midstream sector and on down the line to recoup the billions each new well cost to open.

I would imagine Russia and it’s new relationship with many OPEC nations will start fucking things up too, possibly with China.

The previous bubble may have burst but the cycle will continue and I would imagine we will see higher prices again sooner than later.

The interesting thing about new developments is that all of the contractors have put their prices up in line with higher oil prices and have all invested in new rigs and installation vessels and now with $40 dollar oil new developments are falling over like dominos - so even if there were viable new developments the oil companies are opting not to execute them due to high costs, several developments here in Australia have been cancelled or put on ice and several more are looking wobbly. I just don’t see how prices can stay low for long. OPEC have said they look to defend a $75 barrel cost so we can expect to see cuts until then.

As for the Russian theory http://www.breitbart.com/article.php?id=D954KDNO0&show_article=1

[quote]snipeout wrote:
As for the Russian theory http://www.breitbart.com/article.php?id=D954KDNO0&show_article=1 [/quote]

I bet china will jump in to the fray, even though they are taking a hard hit themselves. And probably sometime shortly after the new year.

It was apparently priced in because oil dropped like a rock today after the cuts became official.

[quote]msd0060 wrote:
It was apparently priced in because oil dropped like a rock today after the cuts became official.[/quote]

I don’t think it was priced in, I think oil dropped today because the market didn’t actually believe that all of the OPEC members would actually align and cut production as stated.

I think it won’t change anything.

World demand is dropping due to the economic slump.

Some of the OPEC countries like Iran and Venezuela depend heavily on their oil revenues. So while they might sign off on a reduction in production, they’ll sell some “off the books” to increase revenues.

Other countries that aren’t part of OPEC, like Russia, might also be more than willing to pick up any slack.

[quote]pookie wrote:
I think it won’t change anything.

World demand is dropping due to the economic slump.

Some of the OPEC countries like Iran and Venezuela depend heavily on their oil revenues. So while they might sign off on a reduction in production, they’ll sell some “off the books” to increase revenues.

Other countries that aren’t part of OPEC, like Russia, might also be more than willing to pick up any slack.

[/quote]

Right, but if you keep following the demand curve you will eventually find it again by continuously cutting available supply.

And with Russia chumming up to venezuela and iran, both OPEC members, I wouldn’t count on them.

[quote]FormerlyTexasGuy wrote:
Right, but if you keep following the demand curve you will eventually find it again by continuously cutting available supply.[/quote]

But cutting production means cutting revenues. For countries with little else to offer the world but oil, there’s a point beyond which they won’t want to cut any further. I don’t think many countries are willing to do much self-sacrifice to reduce world supply.

Since Russia is not a member of OPEC, it’s in its interest to have OPEC reduce production - it can pick up the slack and increase its revenues. OPEC won’t play that game very long.

[quote]pookie wrote:
FormerlyTexasGuy wrote:
Right, but if you keep following the demand curve you will eventually find it again by continuously cutting available supply.

But cutting production means cutting revenues. For countries with little else to offer the world but oil, there’s a point beyond which they won’t want to cut any further. I don’t think many countries are willing to do much self-sacrifice to reduce world supply.

And with Russia chumming up to venezuela and iran, both OPEC members, I wouldn’t count on them.

Since Russia is not a member of OPEC, it’s in its interest to have OPEC reduce production - it can pick up the slack and increase its revenues. OPEC won’t play that game very long.

[/quote]

Yup, what he said.

In the past the Russians have agreed to go along with Opec and cut production only to massively increase it instead. The Russians need all the oil money they can get.

The Venezualan and the Iranian governments cannot fund their budgets with oil below $70 a barrel.

With all the job losses and economic woes it is difficult to see how the market will support $70 a barrel. People will change their consumption habits to compensate for price rises. Until the economy stabilizes they are going to have a hard time getting that price back up.

[quote]pookie wrote:
FormerlyTexasGuy wrote:
Right, but if you keep following the demand curve you will eventually find it again by continuously cutting available supply.

But cutting production means cutting revenues. For countries with little else to offer the world but oil, there’s a point beyond which they won’t want to cut any further. I don’t think many countries are willing to do much self-sacrifice to reduce world supply.

And with Russia chumming up to venezuela and iran, both OPEC members, I wouldn’t count on them.

Since Russia is not a member of OPEC, it’s in its interest to have OPEC reduce production - it can pick up the slack and increase its revenues. OPEC won’t play that game very long.

[/quote]

Cutting production doesn’t necessarily mean cutting revenue. You are assuming a static price which we know isn’t the case.

If they sell 10 barrels of oil for $1, they make $10.

If they cut supply so much people have to pay a premium (the goal) and sell 5 barrels for $3, they make $15 and prolong their limited resource for twice as long.

Even in a recession, oil is a necessity and unless legal, political or military interaction intervenes to control prices (scarier than high oil prices) the bottom will be found and people will have to pay a premium price.

You have to leave basic supply vs. demand and consider demand and supply price curves to be accurate. I wish I could draw charts online.

Russia seems to me to be courting OPEC, possibly for membership. They are the other superpower, with china shortly behind, and failed against us once because of a weaker economy due to fewer natural resources.

Perhaps this is the beginning of their comeback. They see who controls the commodity that the world economy today essentially is hinged on and will undoubtedly go with the key holders in hopes of loyalty and allies of their own.

And, understanding demand price curves, every country who relies on oil revenue stands to gain by cutting until they find the premium price where their product sells for the most profit for the least amount of units. Just like any product.

Even in the US oil companies are groaning and hoping for a return of high world market oil prices. Our private sector isn’t tied to our gov’t like many oil producing nations, but you can bet your ass the oil producers here want to see cuts until it is profitable to expand business by opening new wells, selling fewer units of gas and oil for more money etc.

The more they can squeeze out of a 1 million barrel reserve for example, the better. It’s business. Efficient profitability is key.

[quote]pat wrote:
pookie wrote:
FormerlyTexasGuy wrote:
Right, but if you keep following the demand curve you will eventually find it again by continuously cutting available supply.

But cutting production means cutting revenues. For countries with little else to offer the world but oil, there’s a point beyond which they won’t want to cut any further. I don’t think many countries are willing to do much self-sacrifice to reduce world supply.

And with Russia chumming up to venezuela and iran, both OPEC members, I wouldn’t count on them.

Since Russia is not a member of OPEC, it’s in its interest to have OPEC reduce production - it can pick up the slack and increase its revenues. OPEC won’t play that game very long.

Yup, what he said.[/quote]
He is assuming a static price which isn’t the case. The cuts manipulate price favorably for oil holders which is discussed in a reply to him.

Sifu mentioned that Iran needs 70$ barrels of oil to function. It is the number that allows new and profitable exploration for Iran to bring oil from the ground to the market.

They aren’t making money right now. It isn’t economically feasible knowing that oil production is Very expensive. It’s like pouring a few thousand dollars into home improvements on a house that is slowly burning down, with no water in sight.

They need and will push to cut production until oil is at the price necessary for profit. And beyond.

[quote]Sifu wrote:
In the past the Russians have agreed to go along with Opec and cut production only to massively increase it instead. The Russians need all the oil money they can get.

The Venezualan and the Iranian governments cannot fund their budgets with oil below $70 a barrel.

With all the job losses and economic woes it is difficult to see how the market will support $70 a barrel. People will change their consumption habits to compensate for price rises. Until the economy stabilizes they are going to have a hard time getting that price back up.[/quote]

That depends on how much oil non opec nations are willing to contribute to the market.

opec controls a large percentage of the worlds oil supply available for production. In theory, they carry enough weight to continue cutting until we have a shortage here like in the seventies.

Unless we and our own allies up production, opec can cut at will and drip us dry.

And it is too cheap for our own exploration to continue.

You might cut back your consumption, but when so little oil is available you have to wait three hours to get a rationed gallon or two, you can bet you will be crying for it, and the people in charge of selling it will be doing so for higher and higher prices.

We are like little crack babies for gas. And there is a point where we will have to pay what ever price is fed to us. Iran seems intent on finding it. Hopefully they don’t garner enough support to do so.

Maybe all these countries that nationalized their oil fields and threw the US and Britain out might be thinking twice. They can attempt to charge whatever they want. It’s another matter if it will sell.

I’m fully aware that the price isn’t static.

It’s not as easy to control as you imply either. OPEC announced a cut in production and oil futures went down. That means that the countries producing less will also sell for less. Instead of the 5 barrels at 3$, they’ll be selling 5 barrels at $0.75… At some point, some of the countries won’t want to reduce production any further; and the more they hurt financially, the more they’ll be tempted to “cheat” and sell more than they claim.

Your example also has the reverse problem of assuming constant demand. When prices go too far up, demand falls.

To exert control on prices as easily as you claim, OPEC would need to include all oil producing countries and make sure all it’s members are on the up and up. Right now, OPEC is more like a club of thieves and backstabbers.

[quote]pookie wrote:
I’m fully aware that the price isn’t static.

It’s not as easy to control as you imply either. OPEC announced a cut in production and oil futures went down. That means that the countries producing less will also sell for less. Instead of the 5 barrels at 3$, they’ll be selling 5 barrels at $0.75… At some point, some of the countries won’t want to reduce production any further; and the more they hurt financially, the more they’ll be tempted to “cheat” and sell more than they claim.

Your example also has the reverse problem of assuming constant demand. When prices go too far up, demand falls.

To exert control on prices as easily as you claim, OPEC would need to include all oil producing countries and make sure all it’s members are on the up and up. Right now, OPEC is more like a club of thieves and backstabbers.
[/quote]

Yes, futures did go down and yes, the countries are less profitable because of it per barrel sold.

They are actually saving money though. As the demand and price drops, so does their production (which is really pretty fucking weird, but we are discussing a limited resource, not reproduce able widgits) so there are 2.2 million less barrels being sold at a lower price. They are holding on to their resources and are essentially winning rather than putting them out there to be sold at a low price. They can’t reproduce oil like a given widget. Economic laws bend for limited resources.

They have not found the bottom yet, but will, and will hold back on production in a cheap market while doing so. The curve is adjusting with every cut and price drop made. It will find it’s point and the valves could potentially be cut further, to force a price jump. It’s finding the point in a changing economy that takes time. There is no Ceteris Paribus reference to use as a guide.

It is really very smart on their part.

[quote]FormerlyTexasGuy wrote:
They are actually saving money though. As the demand and price drops, so does their production (which is really pretty fucking weird, but we are discussing a limited resource, not reproduce able widgits) so there are 2.2 million less barrels being sold at a lower price. They are holding on to their resources and are essentially winning rather than putting them out there to be sold at a low price. They can’t reproduce oil like a given widget. Economic laws bend for limited resources.[/quote]

Good point. Although depending on how long it takes to find bottom and get the prices rising again, some of them will have to find money somewhere.

[quote]pookie wrote:
FormerlyTexasGuy wrote:
They are actually saving money though. As the demand and price drops, so does their production (which is really pretty fucking weird, but we are discussing a limited resource, not reproduce able widgits) so there are 2.2 million less barrels being sold at a lower price. They are holding on to their resources and are essentially winning rather than putting them out there to be sold at a low price. They can’t reproduce oil like a given widget. Economic laws bend for limited resources.

Good point. Although depending on how long it takes to find bottom and get the prices rising again, some of them will have to find money somewhere.
[/quote]

And if it wasn’t for Saudi Arabia, they would probably cut super low and then find their way up to avoid the world falling in to total chaos. Or they would just let it fall apart and claim Allah is blessing them.

They will probably fall back on Heroine production as they have been doing for centuries while they find the level that makes them “Richer than God” for the long term.

I wouldn’t be surprised to see some re-arranging taking place. Russia and China both can offer very titillating military knowledge and tools that could potentially re-arrange OPEC and the world effectively.