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Speculation rises over Opec output freeze

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By Ed Crooks: September 2, 2016

Over the past month, the big stories in the oil market have been speculation about a possible production freeze from Opec, and the reality of rising activity in the US shale industry.

The rumours of Opec action have followed the pattern that has become wearingly familiar over the past couple of years, since the landmark meeting in November 2014 confirming that Saudi Arabia was not prepared to cut production to try to stabilise prices.

As the meeting – in this case, a gathering on the sidelines of the International Energy Forum in Algiers on September 26-28 – grows nearer, suggestions that a freeze will be discussed grow louder. Venezuela, which has the most urgent need for a higher oil price, sounds the most enthusiastic about curbing production. Other countries make supportive statements and agree to meet, without promising any action themselves.

Saudi Arabia, which calls the shots, remains studiedly non-committal. All the time, actual production, as opposed to aspirational future output, keeps rising. Everything is falling into place for another damp squib of a meeting that delivers no agreement on production limits.

All that said, Opec’s ability to spring surprises should never be counted out. Reuters reports that this time there is a different element, in Saudi Arabia’s desire to lift the valuation of Saudi Aramco for its IPO in 2018. That could swing the Saudis behind a production freeze at last, Reuters suggests. We will find out in four weeks’ time.

Meanwhile, the number of rigs at work drilling for oil in the US has been rising, although the increase stalled last week, according to Baker Hughes, the oilfield services group that publishes the best-known rig count.

The upturn in the US shale industry is ominous for other producers. Schlumberger, the world’s largest oilfield services group, warned that deepwater drilling was continuing to decline.

In the longer term, what might be even more worrying for oil producers is the rise of electric cars, looked at in depth by Pilita Clark and Peter Campbell this week. It takes a lot of electric vehicles to displace quite a small amount of oil demand – 50m-100m EVs on the road would cut oil consumption by just 1m b/d – but the rapid growth of renewable power shows that disruptive change can spring surprises on apparently solidly-based industries.

Oil and gas operators in the Gulf of Mexico have been warned by US regulators that they have a big problem with failures of the four-foot bolts used to hold equipment together on the sea-bed. One day, a failure “could potentially cause another catastrophe like the 2010 Deepwater Horizon disaster”, Chris Tomlinson wrote in the Houston Chronicle.

The Hollywood version of how that disaster happened, called ‘Deepwater Horizon’, opens in US cinemas this month. There are bound to be arguments over its account of what happened on April 20, 2010, when 11 men lost their lives, but the seriousness of the film-makers’ attempt to recreate the look of offshore oil drilling is impressive.

Chart of the week

Falling costs and rising capacity of batteries are good news for electric cars.

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