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The death of Opec?

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By Ed Crooks: 27 May 2016

“Insanity is doing the same thing, over and over again, but expecting different results.” That widely-misattributed line, first published by the novelist Rita Mae Brown, has apparently been taken to heart in the oil market at last.

After a succession of Opec meetings that were preceded by fevered speculation about action to support crude prices – mostly recently the much-discussed plan for a production “freeze” that fell apart in Doha in April – no-one has any great expectations for the ministerial gathering in Vienna next week. “The freeze is finished,” one Opec delegate said.

Indeed, some analysts are suggesting that the cartel’s failure to reach a united position is not merely a sign that its influence is at a cyclical low ebb, but a portent of a more structural shift into irrelevance. Bloomberg put it in dramatic terms, arguing that “Saudi Arabia, one of the founders of Opec, is sounding the group’s death knell.

Reports of “the death of Opec” have a long history, of course, and so far they have always proved to be exaggerated. But in a sign that perhaps there really is something fundamentally new here, the International Energy Agency, Opec’s buy-side counterpart, is thinking about publishing “scenario” forecasts of the cartel’s production for the first time. As Robert Perkins explained for Platts, the shift would represent an acknowledgement that Opec – read Saudi Arabia – could no longer be expected always to set its production to bring supply and demand into balance.

The effectiveness or otherwise of Opec might seem less significant right now, because the oil price has been doing a good job of rebounding from its lows earlier in the year, even without any help from a “freeze”.

There have been more indicators pointing to longer-term tightness in crude supply. With oil discoveries in 2015 already at a 60-year low, BP has confirmed that it is one of the companies joining the shift away from frontier exploration.

On the other hand, there have also been indicators pointing to shorter-term strength in production. The high-yield energy bond market has been strengthening along with the crude price, and this week it opened – if only a little – for a US E&P company for the first time this year. It showed that source of financing has not dried up altogether, even if the banks are pulling back.

Debt conditions are looking less favourable for countries including Nigeria and Venezuela that borrowed money from China to be repaid in crude: they are now facing crippling repayments.

ExxonMobil and Chevron faced investors at their annual meetings on Wednesday, with pressure from shareholders over their stance on climate change greater than ever. Although they were in different time zones, the two meetings actually ran simultaneously, presumably because of some unfortunate scheduling mix-up. Exxon came under the most pressure, with Calpers calling out its board for being “encloistered” and failing to listen to investors’ views. In the shareholder votes, calls for the companies to analyse the effect on their businesses of government policies designed to keep the increase in global temperatures to 2 degrees C were rejected, albeit with substantial minority support. However, Exxon shareholders did vote to make it easier for them to nominate directors, which will increase their leverage over the board.

Total, meanwhile, not only published the report on a 2 degrees scenario, it also said it planned to have 20 per cent of its assets in renewable energy in 20 years.

There were also a couple of reality checks on the energy transition away from fossil fuels. Scientific American had a great report on the challenges facing advanced biofuels. And Saudi Arabia revisited its ambitious solar power programme, which was launched four years ago with a goal of installing 41GW, but made little progress. Now the kingdom is trying again, but its new goal is a more modest 9.5GW.

Donald Trump set out his thinking on energy in a speech in North Dakota, basing his strategy largely on fossil fuels and drawing criticism from the American Wind Energy Association.

Quote of the week

“The world is going to have to continue using fossil fuels, whether they like it or not” – Rex Tillerson, ExxonMobil’s chief executive, at the company’s annual meeting.

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