Negotiated Oil Export Reduction Between OPEC and Non OPEC State Oil Producers?

by James DiGeorgia | 02/22/2016 06:09 PM
Negotiated Oil Export Reduction Between OPEC and Non OPEC State Oil Producers?

Saudi Oil Minister Ali Al-Naimi is legitimately the world's oil market most influential policy maker. After meeting with Oil Ministers from Russia, Qatar, Venezuela, Iraq and Iran last week Al-Nami will attend an international gathering of energy industry leaders, experts, government officials and policymakers, leaders from the technology, financial, and industrial communities – and energy technology innovators in Houston Texas this week.

Ali Al-Naimi on Tuesday will give the keynote speech at the IHS CERAWeek conference where he will be addressing a wide cross section of North American oil producers including U.S. Wildcatters, Shale oil producers large and small and traditional oil producers who have seen the price of oil collapse by as much as 70%.

It's the first time Al-Nami will be facing and addressing a room full of victims of Saudi Arabia's decision to keep pumping oil despite a global glut. The decision not to cut Saudi oil production has lead directly to the price collapse in oil over the past 20 months. He is likely to insist that the decision by Saudi Arabia and OPEC not to cut production was not directed at any production specific countries or companies, but was instead effort to protect the Kingdom and OPEC's market share against fast-growing, higher-cost producers.

Al-Nami's market share argument is likely to meet with a great deal of skepticism from U.S. shale oil producers struggling to survive the worst price crash in more than a decade. Al-Nami announced 10 days ago that an agreement has been reached between Saudi Arabia, Qatar, Russia and Venezuela to freeze oil output at January levels - near record highs. The agreement was represented as a first step towards negotiations would take place between OPEC and Non-OPEC members to reduce oil their oil sales in an effort to buttress the world market price.

The effort to negotiate a coordinated reduction of oil exports ran into immediate trouble last Tuesday after Iran and Iraq, two of the main hurdles to any negotiated agreement failed to express any commitment to the idea. Iran is anxious to reclaim its market share lost to sanctions, and Iraq desperately needs to increase its oil revenues to combat ISIS that controls almost a third of its country.

I have proffered the idea that the Saudi decision to allow a oil glut in the world market was intended to do two things. First compromise the Russian economy in hopes of reducing its financial and military support for Iran and Syria. Secondly, to kick the financial legs out from under the North American shale oil production.

The strategy has partially worked. Over 1000 oil rigs in North America have shut down and a slew of companies in the oil patch like Swift Energy have already been forced to file for bankruptcy. In fact, over 40 U.S. oil and natural gas producing companies have declared bankruptcy since the beginning of 2015.

The pain in the oil patch is far from over. Dozens of oil and natural gas producers are likely to be forced into shutting their doors thanks to financing crisis that has been created by the oil glut. Banks and private lenders are cutting the value of energy companies' oil and gas reserves, the collateral for credit, needed to finance their operations.

The Saudi oil glut strategy also served to push the Russian economy into a recession and towards a financial crisis. The Russian's are now at least making a show of negotiating a cease fire in Syria.

Flooding the Oil Market: Backfired on Saudi Arabia!

The steep drop in the price of oil has also hammered the Saudi economy which saw Standard & Poor's downgraded Saudi Arabia's credit rating last Tuesday. The Saudi Kingdom has been forced to cut back its cradle to grave benefits to its citizens that are designed to keep a clamp on any domestic social or religious unrest.

The Saudi and Sunni Oil Kingdom's are fighting a multi front proxy war against Iran. In essence this is a religious war between Shiites and Sunni's that has been taking place for 700+ years, being fought with modern weapons that could scale to those of mass destruction if not ended sooner than later.

U.S. and North American Oil producers are not likely to be comforted by Al-Nami in Houston. The reality remains that oil even in the best case scenerio is not likely rise much over the US$45-$50 range. High enough over the current range for crude oil of US$25-$35 a barrel to help both the Russian and Saudi's financial squeeze but not high enough to help U.S oil producers like Continental Resources ( NYSE:CLR) that have seen its share price tumble more than 75% since peaking in 2014.

This reality undermines hopes by some North America oil producers that are betting that OPEC will bail them out with a coordinated export cut may be deluding themselves. EOG Resources, Inc. (EOG) Chairman William Thomas speculated, a bit deulsionally, this past week in one press report that the price of oil could shoot back up as high as US$80 in part because of OPEC's being eventually forced to negotiate an substantial export cut.While I believe oil could rise to US$50 a barrel by the end of 2016, and many U.S. listed oil companies like Anadarko Petroleum (NYSE: APC), Chevron (NYSE:CVX) , APACHE (NYSE: APA) could see their share price bounce 30% to 50% in the next 12 months. The reality that oil production would likely ramp up to pre-oil crash levels at US$70 - $80 oil, should keep a cap on the price of oil capped at around $50 for the next few years.

The wild card in all this would be direct attacks on Sunni and African oil fields by terrorists. Short of a serious threat to the flow of oil, US$70 to $80 oil is off the table for the time being.

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