Like it or not, looks like the oil price is heading towards $60 per barrel, driven on by OPEC with more than tacit support from Russia. If soundbites received at the conclusion of the International Energy Forum in Algiers on 28 September are to be believed, the cartel is on course to cut production to a range of 32.5 to 33 million barrels per day (bpd) led by Saudis, in a move likely to be supported by the Russians with some action of their own.
Since both the Russians and Saudis have started talking about “prices”rather than production levels, the coming together of Moscow and Riyadh – who between them are pumping over 20 million bpd – along with the rest of OPEC for some good old fashioned market tinkering appears inevitable.
Of course, the so-called lowering of OPEC production – details of which we are unlikely to receive before the conclusion of the cartel’s next summit on 30 November – will most likely exclude Libya, Nigeria and Iran for multitude of reasons ranging from an improvement in security situation in Nigeria and Libya to Iran’s unwillingness to cap its production until it reaches its pre-sanctions level of 4 million bpd.
Nonetheless, the market senses it will happen because OPEC’s policy of keeping the taps open, in place since June 2014 when the Saudis insisted on it, has failed to land a fatal blow on US shale players. Bjarne Schieldrop, Chief Commodities Analyst at Nordic bank SEB says, “With several market references to ‘$60 is what US shale oil needs’, it seems OPEC is now naturally aiming for this. Not only has OPEC’s verbal intervention so far lifted crude oil prices higher; by indicating that it is willing to freeze or cut and stabilize the oil market, it has also re-implemented the ‘OPEC put’, taking care of the downside risk.
“With all the pre-negotiations now going on and all the different supportive statements from both Saudi Arabia as well as Russia, it now looks like a fair chance that there will actually be an agreement in Vienna on 30 November.”
However, with the downside risk being taken care of, among those smiling the most are the very shale players stateside that OPEC attempted to knock out of the game. Agreed the oil price, using Brent as a benchmark, is still significantly below $60. However, US shale oil players and Canadian upstarts can lock in new, planned production on the forward curve. This is already reflected in the gradually rising North American rig counts.
Expect more, with perceived reduction in the downside risk as the implementation date of the ‘OPEC put’ draws nearer. From a low of just north of 300 US rigs in May, by the time OPEC’s next summit convenes, we could well be above 500 rigs based on the anecdotal evidence I have from selected law firms in Chicago and Houston, central to the paperwork for drilling permits.