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Posts Tagged ‘shale oil’

OPEC deal pushes up oil prices

OPEC members agreed on 30 November 2016 to reduce their total oil output by 1.2m barrels per day (b/d) from January 2017 – the first OPEC cut since 2008. The biggest cut (0.49m b/d) is to be made by Saudi Arabia.

Russia has indicated that it too might cut output – by 0.3m b/d. If it carries through with this, it will be the first deal for 15 years to include Russia. OPEC members hope that non-OPEC countries will also cut output by 0.3m b/d. There will be a meeting between OPEC and non-OPEC members on 9 December in Doha to hammer out a deal. If all this goes ahead, the total cut would represent nearly 2% of world output.

The OPEC agreement took many commentators by surprise, who had expected that Iran’s unwillingness to cut its output would prevent any deal being reached. As it turned out, Iran agreed to freeze its output at current levels.

Although some doubted that the overall deal would stick, there was general confidence that it would do so. Markets responded with a huge surge in oil prices. The price of Brent crude rose from $46.48 per barrel on 29 November to $54.25 on 2 December, a rise of nearly 17% (click here for a PowerPoint of the chart)..

The deal represented a U-turn by Saudi Arabia, which had previously pursued the policy of not cutting output, so as to keep oil prices down and drive many shale oil producers out of business (see the blog, Will there be an oil price rebound?)

But if oil prices persist above $54 for some time, many shale oil fields in the USA will become profitable again and some offshore oil fields too. At prices above $50, the supply of oil becomes relatively elastic, preventing prices from rising significantly. As The Observer article states:

It is more likely that a $60 cap will emerge as the Americans, who stand outside the 13-member OPEC grouping, unplug the spigots that have kept their shale oil fields from producing in the last year or two.

… The return to action of once-idle derricks on the Texas and Dakota plains is the result of efficiency savings that have seen large jobs losses and a more streamlined approach to drilling from the US industry, after the post-2014 price tumble rendered many operators unprofitable. Only a few years ago, many firms struggled to make a profit at $70 a barrel. Now they can be competitive at much lower prices, with many expecting $50 for West Texas Intermediate – a lighter crude that typically earns $5 a barrel less than Brent.

OPEC as a cartel is much weaker than it used to be. It produces only around 40% of global oil output. Cheating from its members and increased production from non-OPEC countries, let alone huge oil stocks after two years when production has massively exceeded consumption, are likely to combine to keep prices below $60 for the foreseeable future.

Webcasts
OPEC Cuts Daily Production by 1.2 Million Barrels MarketWatch, Sarah Kent (30/11/16)
How Putin, Khamenei and Saudi prince got OPEC deal done Reuters, Rania El Gamal, Parisa Hafezi and Dmitry Zhdannikov (2/12/16)
Fuel price fears as OPEC agrees to cut supply Sky News, Colin Smith (30/11/16)
OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years Bloomberg, Jamie Webster (30/11/16)
Game of oil: Behind the OPEC deal Aljazeera, Giacomo Luciani (3/12/16) (first 10½ minutes)
Russia won’t stick with its side of the OPEC cut bargain CNBC, Silvia Amaro (1/12/16)

Articles
Oil soars, Brent hits 16-month high after OPEC output deal Reuters, Devika Krishna Kumar (1/12/16)
OPEC reaches a deal to cut production The Economist (3/12/16)
Opec doesn’t hold all the cards, even after its oil price agreement The Observer, Phillip Inman (4/12/16)
Saudi Arabia discussed oil output cut with traders ahead of Opec Financial Times, David Sheppard and Anjli Raval (4/12/16)
The return of OPEC Reuters, Jason Bordoff (2/12/16)
‘Unfortunately, We Tend To Cheat,’ Ex-Saudi Oil Chief Says Of OPEC Forbes, Tim Daiss (4/12/16)
After OPEC – What’s Next For Oil Prices? OilPrice.com (2/12/16)
The OPEC Oil Deal Sells Fake News for Real Money Bloomberg, Leonid Bershidsky (1/12/16)

Data and information
Brent crude prices, daily US Energy Information Administration
OPEC home page Organization of the Petroleum Exporting Countries
OPEC 171st Meeting concludes OPEC Press Release (30/11/16)

Questions

  1. What determines the price elasticity of supply of oil at different prices?
  2. Why is the long-term demand for oil more elastic than the short-term demand?
  3. What determines the likelihood that the OPEC agreement will be honoured by its members?
  4. Is it in Russia’s interests to cut its production as part of the agreement?
  5. Are higher oil prices ‘good news’ for the global economy and a boost to economic growth – a claim made by Saudi Arabia?
  6. What role does oil storage play in determining the effect on the oil price of a cut in output?
  7. What are oil prices likely to be in five years’ time? Explain your reasoning.
  8. Is it in US producers’ interests to invest in new shale oil production? Explain.
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Oil prices continue to fall

Over the past three months oil prices have been falling. From the beginning of September to the end of November Brent Crude has fallen by 30.8%: from $101.2 to a four-year low of $70.0 per barrel (see chart below: click here for a PowerPoint). The fall in price has been the result of changes in demand and supply.

As the eurozone, Japan, South America and other parts of the world have struggled to recover, so the demand for oil has been depressed. But supply has continued to expand as the USA and Canada have increased shale oil production through fracking. As far as OPEC is concerned, rather than cutting production, it decided at a meeting on 27 November to maintain the current target of 30 million barrels a day.

The videos and articles linked below look at these demand and supply factors and what is likely to happen to oil prices over the coming months.

They also look at the winners and losers. Although falling prices are likely in general to benefit oil importing countries and harm oil exporting ones, it is not as simple as that. The lower prices could help boost recovery and that could help to halt the oil price fall and be of benefit to the oil exporting countries. But if prices stay low for long enough, this could lower inflation and even cause deflation (in the sense of falling prices) in many countries. This, in turn, could dampen demand (see the blog post, Deflation danger). This is a particular problem in Japan and the eurozone. Major oil importing developing countries, such as China and India, however, should see a boost to growth from the lower oil prices.

Some oil exporting countries will be harder hit than others. Russia, in particular, has been badly affected, especially as it is also suffering from the economic sanctions imposed by Western governments in response to the situation in Ukraine. The rouble has fallen by some 32% this year against the US dollar and nearly 23% in the past three months alone.

Then there are the environmental effects. Cheaper oil puts less pressure on companies and governments to invest in renewable sources of energy. And then there are the direct effects on the environment of fracking itself – something increasingly being debated in the UK as well as in the USA and Canada.

Videos
Oil price at four-year low as Opec meets BBC News, Mark Lobel (27/11/14)
Opec losing control of oil prices due to US fracking BBC News, Nigel Cassidy (4/12/13)
How the price of oil is set – video explainer The Telegraph, Oliver Duggan (28/11/14)
How Oil’s Price Plunge Impacts Wall Street Bloomberg TV, Richard Mallinson (28/11/14)
Oil Prices Plummet: The Impact on Russia’s Economy Bloomberg TV, Martin Lindstrom (28/11/14)

Articles
Oil prices plunge after Opec meeting BBC News (28/11/14)
Crude oil prices extend losses Financial Times, Dave Shellock (28/11/14)
Oil price plunges after Opec split keeps output steady The Guardian, Terry Macalister and Graeme Wearden (27/11/14)
Falling oil prices: Who are the winners and losers? BBC News, Tim Bowler (17/10/14)Hooray for cheap oil BBC News, Robert Peston (1/12/14)
Russian Recession Risk at Record as Oil Price Saps Economy Bloomberg, Andre Tartar and Anna Andrianova (28/11/14)
Rouble falls as oil price hits five-year low BBC News (1/12/14)

Data
Brent Spot Price US Energy Information Administration (select daily, weekly, monthly or annual: can be downloaded to Excel)
Spot exchange rate of Russian rouble against the dollar Bank of England

Questions

  1. Use a diagram to illustrate the effects of changes in the demand and supply of oil on oil prices.
  2. How does the price elasticity of demand and supply of oil affect the magnitude of these price changes?
  3. Explain whether (a) the demand for and (b) the supply of oil are likely to be relatively elastic or relatively inelastic? How are these elasticities likely to change over time?
  4. Distinguish between the spot price and forward prices of oil? If the three-month forward price is below the spot price, what are the implications of this?
  5. Analyse who gains and who loses from the recent price falls.
  6. What are the effects of a falling rouble on the Russian economy?
  7. What are likely to be the effects of further falls in oil prices on the eurozone economy?
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