Reports of OPEC+ increasing oil production in December—and in particular that Saudi Arabia is willing to weaken prices to defend market share—is unlikely to be a repeat of 2014’s oil crisis, analysts said.
But an OPEC shift toward winning market share rather than price support could send oil prices into the $50s or $60s, analysts warned.
The Financial Times, citing people familiar with Saudi’s thinking, reported Sept. 26 that the kingdom is committed to OPEC+ raising production as planned on Dec. 1—and dropping its unofficial $100/bbl oil price target to defend its market turf.
While the move by Saudi would be unlikely to lead to an all-out price war—as OPEC’s actions did in 2014 to punish shale oil producers—“this would clearly be a headwind for oil prices and oilfield service stocks,” Stifel analysts said Sept. 26.
An upswing in production, while not necessarily aimed at U.S. shale producers, could send WTI and Brent prices spiraling, analysts said.
OPEC and its allies, including Russia, are scheduled to raise output by 180,000 bbl/d in December, as part of a plan to start unwinding its most recent layer of output cuts.
A lifting of voluntary quotas could result in the group adding 1 MMbbl/d in the coming months—with a further 1 MMbbl/d upside if OPEC decides to move fully back to a market share policy, Jefferies analyst Giacomo Romeo said in a Sept. 26 report.
“Russia subsequently commented suggesting OPEC+ is unlikely to make changes to current output levels. We would also highlight that OPEC+ has never had an oil price target but has historically based its output decision based on global crude inventory levels.”
Andrew Fletcher, senior vice president of commodity derivatives for KeyBank National Association, wrote on Sept. 26 that oil markets were roiling over the Financial Times article and a reported agreement between warring factions in Libya that could see production and exports rise.
Fletcher said that if the reporting is accurate, “come December there will be no unilateral production cuts [from Saudi and OPEC] and the market will get ugly quickly.” He noted that 2025 crude prices were already “looking rocky to begin with. Technical support for WTI is at $65.27/bbl.”
Fletcher told Hart Energy he thinks the “Saudis are just tired of doing all the heavy lifting in terms of price and seemingly just giving up market share to the likes of Iran and Iraq.”
“I don’t think their policy is specifically aimed at U.S. shale producers as they know they have limited influence over U.S. producers, but obviously lower prices will influence output,” he said. “I assume their thinking is lower prices will help bring OPEC into line while stalling expansion of non-OPEC producers like Guyana and Kazakhstan.”
He added that Saudi Arabia’s Crown Prince Mohammed bin Salman is determined to diversify the Saudi economy away from its reliance on petroleum, “so maybe Saudi is less concerned about lower oil prices, but I take that argument with a pinch of salt.”
Robert Yawger, director of energy futures at Mizuho Securities USA, said a market share war is the worst case scenario.
“Saudi has gone above and beyond in recent years to prop up prices” but the market never really got close to $100/bbl prices, Yawger said.
OPEC+ had cut production by around 5.5 MMbbl/d in the 2020 slide to negative pricing, while the U.S. “has been printing all-time high production numbers” of up to 13.4 MMbbl/d, while Canada and Brazil are also dipping into their market share.
“Demand is partly to blame. China has been the global crude oil demand growth engine for years,” he said, adding it’s probably down 2% to 3% this year," he added.
Jefferies’ take: Saudi Arabia is telegraphing a cautionary message to OPEC+ members producing above their quotas—Kazakhstan and Iraq in particular—rather than necessarily changing strategy.
“In our view, a shift to market share policy would lead to a prolonged period of lower oil price (Brent $60/bbl or below) and deep fiscal deficit in multiple OPEC countries,” Romeo said.
Jefferies said U.S. output growth would begin to slow below $60/bbl WTI and halt at $55/bbl.
Stifel analysts noted that despite a disciplined approach from U.S. E&Ps, U.S. oil production has risen by roughly 1.1 MMbbl/d to 26.4 MMbbl/d from 25.4 MMbbl/d in 2023.
The move would also be costly to Saudi Arabia. At $55/bbl WTI (or about $60/bbl Brent), “we estimate that the Saudi government loses ~$45bn annual oil revenue, equivalent to 4.2% of GDP (vs. an $80/bbl scenario),” Jefferies’ Romeo said.
OPEC production offsets
Two OPEC+ sources told Reuters on Sept. 26 that the organization is set to go ahead with a December oil output increase but that its impact would be small in order for some members to make larger cuts. That would allow for member countries to compensate for overproduction delivered in September and later months.
Two OPEC+ members, Iraq and Kazakhstan, have pledged to make extra cuts totaling 123,000 bbl/d in September, and additional curbs in future months, to compensate for earlier pumping above agreed levels.
"When the compensation plan and production figures from those countries becomes clear for September, then that will allow the increment to come in as the impact of the increment will be negligible," one of the OPEC+ sources told Reuters in reference to the December increase.
The output increase in December is not about regaining market share, it is about a small number of countries phasing out their voluntary output cuts, one of the OPEC+ sources said.
Top ministers from OPEC+ are scheduled to meet on Oct. 2 to review the market and are not expected to make any changes to policy, Reuters reported. The ministers could meet again in November, a third OPEC+ source said.
The next OPEC meeting is scheduled for Dec. 1, with an announcement on December output in late October or early November, Jefferies said.
Russian Deputy Prime Minister Alexander Novak told Reuters on Sept. 26 that there were no changes to OPEC+’s plans to start phasing out oil production cuts from December.
This article includes material reported by Reuters.
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