Fast And Furious -- It Continues -- January 28, 2016; OPEC Irrelevant -- Financial Times

From "Fast and Furious" yesterday, I had suggested that Russia and Saudi Arabia need to agree on a one-million bopd cut for each of them.

I guess they read the blog and Saudi is willing to meet me halfway. LOL.

From Reuters: Russia says Saudis propose a 5% global oil cut. The top three are in the 10 million-bopd-oil club -- the US, Saudi Arabia, and Russia. A 5% cut results in 500,000 bopd for each. The US  has done its part. The US has easily cut production by 5% off its high.

The risk for Saudi Arabia is they will not be bold enough and that a cut of any kind will suggest they blinked first (capitulated?), but if the cut is not significant, it won't make a difference. For Saudi, they "lose face" and the price of oil stays low.

Russia and KSA need to move closer to a one-million-bopd cut and all of OPEC needs to agree, and agree to monitoring.

**************************

OPEC Is Irrelevant

After posting the note above the asterisks, I came across this Financial Times article:

The shale revolution in the US has made a huge difference. The US is now arguably the world’s largest oil liquids producer in the world, if you take into account crude oil production and other supply like liquefied petroleum gases (LPGs), biofuels output and the incremental volumetric gains from having the largest refining system in the world.

On paper the US might produce 9.3m barrels a day against Russia’s 11.1m b/d and Saudi Arabia’s 10.3m b/d. Add everything that looks and smells and is used as oil and the US is the biggest of the lot, producing 14.8m b/d versus the kingdom’s 11.7m b/d, versus. Russia’s 11.5m b/d.

We are used to old thinking — a world of producers comprised of Opec plus critical non-Opec producers including especially Russia, Mexico, Norway, Oman and maybe a couple of others. The new order has rendered Opec irrelevant, an organisation crippled by disruptions and sanctions, with no will to work as one, able to be a negative force by bringing prices down, but incapable of finding a way to put a floor under prices.

More, and this puts in a nutshell almost everything I've been saying for years:

The new world is one of three giant producers whose combined liquids output is about 40 per cent of world markets. All three of them play a role and one of them — the US — cannot constitutionally play a role to constructively counteract market forces. Indeed it is the very embodiment of market forces.

The three giants of the oil market are about the same size. But size is only one element. Who makes decisions is another. In the Kingdom of Saudi Arabia there is one decision maker on who turns the valves on and off. In Russia it is a bit more complicated, but at the end of the day it’s a government that’s basically in charge.

The third and biggest of the giants, the US, has production based on competitive decisions of hundreds of independent producers, which now, unshackled, can sell oil at home or abroad.

That makes an enormous difference, especially when considering the nature of marginal production in the US, which comes from shale resources. These rocks are not only superabundant, but they can be exploited at a relatively low cost. Just compare an offshore well at $170m with a vertical shale well that costs under $5m, with a five-year payout for a successful deepwater well versus a mere five-month payout for a shale play. And multiply a single, individual shale well by hundreds of wells and hundreds of decisions and you get a new world order.

But the writer is unable to come up with a solution for the oil and gas industry, for Saudi Arabia, or for Russia. It appears the only "one" not looking for a solution is the US oil and gas industry. 

By the way, did the author make a typographical error or is the writer ignorant about the US tight oil industry -- see that in bold: a vertical shale well that costs under $5m. First of all these wells are horizontal; second, they are not shale (they are tight); and, in the Bakken it costs about $7 million to drill and complete a horizontal well. I will give the writer a pass on the last two, but as far as I know, there are "no" vertical shale wells.