Opec bends the markets

By Ed Crooks, December 2, 2016

In 451 CE, the great Roman general Flavius Aetius rallied a motley army of imperial troops and barbarian allies, and halted the advance of Attila’s Huns at the Catalaunian Plains in Gaul, buying the empire some time and temporarily interrupting its long-term decline. This week’s Opec meeting in Vienna had something of the same feel about it.

Opec’s power peaked in the 1970s, and the US shale oil revolution of the past half-decade has threatened to consign the cartel’s influence to history. But by agreeing a deal to cut production on Wednesday, the Opec ministers showed that if they all acted together they could still bend the oil markets to their will, at least for a while.

Anjli Raval and her FT colleagues had the definitive guide to the details of the deal and its implications. Javier Blas and Grant Smith at Bloomberg highlighted a critical 2am phone call between Khalid al-Falih, Saudi Arabia’s energy minister, and his Russian counterpart Alexander Novak. Russia’s offer to cut its production by up to 300,000 barrels per day next year was important in persuading Opec members to reach a deal, although that reduction will come from current record highs. Ali al-Naimi, Saudi Arabia’s former oil minister, sounded sceptical that the promised support from Russia would actually materialise.

As Mr Naimi suggests, one big question about the deal is how far Opec’s members will comply with their commitments. Jeff Colgan, a professor at Brown University, has calculated that since 1982 Opec agreements have been cheated on 96 per cent of the time, and concluded that this latest agreement would be “mostly meaningless”. John Kemp at Reuters suggested the headline output cut of 1.2m barrels per day would actually take about 750,000-1m b/d off the market. The other big uncertainty, he added, was how fast the US shale oil industry would respond. The majority view from Texas is that, while they applauded – literally – Opec’s move, shale producers will be cautious about ramping up activity.

There were differing views of the deal’s longer-term significance. Jason Bordoff wrote for Reuters that reports of the death of Opec were “greatly exaggerated”, but the FT’s Nick Butler argued that the deal marked “the beginning of the end” for the cartel.

Important context for the agreement is Saudi Arabia’s deep fiscal deficit as it slides towards recession. Other oil-producing countries are also under pressure. The FT carried an excellent report on Nigeria, highlighting the dual problems of its oil industry: low prices and security threats. However Julian Lee of Bloomberg Gadfly suggested rising production could make Nigeria and Libya the biggest threat to the success of the Opec deal.

Geoffrey Styles of GSW Strategy Group suggested the combination of historically high oil inventories with a looming supply gap caused by delays and cancellations of large projects was a “recipe for volatility”.

However, there have been some signs of new oil production and infrastructure projects making progress. BP gave the green light to its Mad Dog 2 deep water development in the Gulf of Mexico. The Canadian government gave approvals for two oil pipeline projects, which between them would create more export capacity from Alberta than the Keystone XL project blocked by President Obama.

As speculation continues over the implications of Donald Trump’s presidency for climate policy, the mayors of about 7,100 towns and cities have formed a network seeking to encourage emissions reductions and planning for resilience in a warming world.

Reince Priebus, picked to be Mr Trump’s chief of staff, told Fox News that his boss’s “default position” on climate change was that “most of it is a bunch of bunk”. However, that view could be challenged by Mr Trump’s daughter Ivanka. Politico reported that Ms Trump was likely to play an influential role in the administration, and saw climate change as “one of her signature issues.”

Harold Hamm, the chief executive of Continental Resources who has advised Mr Trump on energy and had been tipped as a possible energy secretary, said he didn’t want the job, and instead recommended Kevin Cramer, the North Dakota congressman. Mr Cramer talked to the FT earlier this year, when he discussed a plan to investigate Opec for unfair trade practices. Fox Business reported that Gary Cohn, president of Goldman Sachs, could be in line for the energy job, although he is also apparently in the running for another senior role in the administration.

For secretary of state, meanwhile, one rumoured contender is ExxonMobil CEO Rex Tillerson, who is widely expected to retire next year. Mr Tillerson’s predecessor at Exxon, Lee Raymond, has also been mentioned as a possibility for the job.

Finally, a cracking Christmas present idea for the energy enthusiast. Jennifer Allford of the Calgary Herald reported on playing Newtonian Shift: “a facilitated role-playing simulation that allows players to experience decades of energy transition in one day”. Unfortunately you can’t buy it in a shop: you have to sign up for a session, and the website warns sternly that “to play you must be able to commit to full participation for the 5 hours of game play.” But surely a home version cannot be far behind?

Quote of the week

“A lot of high-cost producers reviewed their situation, [and] they became more rational in their production… But we are reacting to the realties, rather than looking back in regret or praise [of] our position” – Mohammed Bin Saleh al-Sada, energy minister of Qatar and holder of Opec’s rotating presidency in 2016, refusing to acknowledge any regrets over allowing oil prices to fall in 2014.