OPEC is drowning in a tide of US shale

by Chris Becker

Last night saw oil prices suddenly drop nearly 4% despite a communique from OPEC/Russia that it intends to extend its production cuts, or about 1.2% of total global demand for another nine months to support the market. Why the divergence?

The daily charts of Brent and WTI Crude show how the nascent price recovery from the start of year correction has been thwarted in almost one session, with Brent in particular on the backfoot:

Despite the trade war truce out of the G20 and the easing of tensions in the Gulf, its the slew of manufacturing PMIs and very dovish central banks indicating an industrial slowdown is coming to end the decade, just as US shale oil supply ramps up:

The problem is exarcebated by OPEC itself, helped along by the big boots of President Trump’s foreign policy kicking ant nests around the globe, which could kick up a greater Middle East conflagration.

From Oilprice.com:

Iran and Venezuela are increasingly putting their foot down, as they claim that the rest of OPEC, especially Saudi Arabia and the UAE, are taking advantage of the US sanctions.  The Iranian sanctions, even if they have not brought exports to zero as US president Trump likes to claim, have been a boon for other OPEC producers, filling in the gaps left by Tehran in Asia and Europe.

This situation has stirred up anger in Tehran and Caracas. In contrast to official statements made by the separate Arab OPEC countries, all have taken the opportunity to expand market share. Iran will have a hard time to regain its position. At the same time, Venezuela is confronted by the same developments, leaving the heavy-oil producer no chance to regain its former glory for a very long time.

In a surprise remark to the press, Iran’s oil minister Bijan Zanganeh said that he will veto OPEC’s long-mooted charter intended to formalize its oil market coordination with Russia and nine other non-OPEC partners. The latter means not only a blockade of Saudi-UAE dreams to incorporate Russia officially, but it also is a slap in the face of Russian president Vladimir Putin and Russia’s Energy Minister Novak. The two Russians have been eager to formalize the OPEC+ deal, supported on the Saudi side by Crown Prince Mohammed bin Salman. The formalization seems to have been one of the discussion points between Putin and MBS at the G20 in Osaka, Japan.

An internal power struggle, as some expect, inside of OPEC, however, could blow up the current stability with a big bang. An open battle between Tehran and Riyadh, combined with increased military and proxy actions in the Persian Gulf, could be the last drop in the bucket.

Crude supply may well be under pressure if the Gulf ignites, but the twin supply/demand nexus of greater flexibility from US shale supply and huge increases in renewable energy could finally break the OPEC grip on global energy prices.

A reminder that oil remains in a long drawn out bear secular market:

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