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Opec cuts neither dead nor alive

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By Ed Crooks November 28, 2016

Opec’s possible production cut is the oil market equivalent of Schrödinger’s cat: neither dead nor alive. When they met in Algiers in late September, Opec ministers agreed the need to reduce output, but left the allocation of the cuts between individual members to be finalised later. If they cannot agree on that, the deal will die. At their meeting in Vienna on Wednesday, the ministers will have to open the box, and we will find out whether or not the agreement is still breathing.

While we wait, there have been many twists and turns in the negotiations over the deal, and even more speculation over their possible conclusion. As Herman Wang of Platts cracked on Twitter: there is an oversupply of Opec headlines. Oil prices have responded accordingly, swinging this way and that as the prospect of an effective deal has seemed closer or further away. Oil traders warned that if Opec failed to reach a final agreement, oil prices could fall by $10 or more.

One complicating factor has been that the Opec members are not only seeking to secure agreement amongst themselves: they also want to bring in some leading non-Opec producers, including Russia. And Russia has been saying it might freeze production – stopping an increase of up to 300,000 barrels per day that is expected for next year – but will not cut from current levels.

Saudi Arabia, Opec’s largest producer and exporter, and the instigator of the plan to allow oil prices to fall, is showing signs of financial and economic strain. However, it could be on the verge of attracting another $30bn to its stock market. Another source of additional capital for the kingdom’s businesses will be the impending IPO of Saudi Aramco, the national oil company. Russell Gold and colleagues at the Wall Street Journal looked at how Aramco is not just a crude oil producer, but is rapidly expanding its petrochemicals operations, diversifying to reduce its exposure to oil prices.

The FT’s David Sheppard took a step back from the rumour mill, and looked at the cartel’s long-term problem, concluding that “the greatest upside Opec can probably hope for is $10-$15 a barrel.” Any price increase above that would be enough to finance strong growth in US supply. Rystad Energy reported that US shale oil production had already stopped falling in September, and would start rising if the number of wells brought into production each month increased from the current figure of about 450.

The productivity gains that make output growth in the US possible were detailed by Trisha Curtis and Ben Montalbano of the consultancy Petronerds in a paper for the Oxford Institute for Energy Studies, arguing that “the shale oil sector is becoming far more resilient and nimble than many had expected.”

Donald Trump has accused the Obama administration of holding back the American oil industry, but Gregory Meyer of the FT argued that we should not expect his proposed deregulation and tax cuts to have much short-term impact on US crude production.

Mr Trump, who has suggested he will withdraw the US from the Paris climate accord, loomed large over this year’s annual Conference of the Parties meeting in Marrakesh. Inside Climate News reported that the talks “ended on a positive note despite Trump threat”. The assessment from the FT’s Pilita Clark was that while other countries said they were “committed to staying the course” on the Paris deal, “far more serious divisions could easily occur in future”.

Jason Bordoff, a former adviser to President Obama now at Columbia University, suggested that Mr Trump would need to embrace the fuel economy standards set by his predecessor to realise his goal of “energy independence”.

As part of a crackdown on registered lobbyists in his transition team, Mr Trump has appointed Thomas Pyle, of the American Energy Alliance, as head of the changeover for the Department of Energy.

Sponsorship of the arts by oil companies, especially BP, has increasingly become a target for environmental campaigners in Britain. The FT reported on the strategy and the debate behind the “BP or not BP?” protest that was staged on Saturday.

Meanwhile, temperatures in the Arctic have been reaching levels described as “scary” by some scientists. Tokyo had its first November snowfall for 54 years, as a cold snap across east Asia drove up demand for coal.  Globally, 2016 is still on course to be the warmest year since records began in 1880, according to the World Meteorological Organisation.

Quote of the week

“I think there is some connectivity [between human activity and climate change]. There is some, something. It depends on how much. It also depends on how much it’s going to cost our companies. You have to understand, our companies are noncompetitive right now. They’re really largely noncompetitive” – Donald Trump discusses climate change with the New York Times at a meeting this week.

Other views

Nick Butler: The Saudis are playing with fire if they raise oil output further

Why the conventional wisdom on peak oil demand is wrong

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