3. Opec and the oil men

13.12.2014

Secretary-general of the cartel has seen the US shale gas industry changing the global political calculus of Big Oil

FOLLOWING thedecision by the Organisation of Petroleum Exporting Countries not to cut productionon November 27, secretary-general of the cartel Abdalla El-Badri told reporters in Vienna: “We are not sending any signals to anybody; we just try to have a fair price.”


If Opecweresending signals, we could guess where those emissions would be directed. The US shale gas industry has changed the global political calculus of Big Oil and its impact on markets — shipping markets included.


Plainly within Opec’s sights, shale gas production has been the primary cause of oil’s dramatic price drop of almost 40\% to around $70 in the first week of December from $115 in June.


The cartel’s strategy, led by Saudi Arabia, the world’s biggest oil exporter, is to keep the price of oil down long enough for US oil drillers using fracking and other costly methods to extractoil from shale depositsin places like North Dakota and Texas to be pushed out of the business.


Opec does have tremendous firepower over pricing, but the organisation itself is under internal pressure. Venezuela, another cartel member, faces default on sovereign debt in the wake of collapsing oil revenues. Nigeria has had to raise interest rates.


Iran has stayed officially silent on the move, but an Iranian news agency reported that oil minister Bijan Zanganeh said the decision wasn’t beneficial to all Opec members. That would imply that keeping the price down for a period long enough to wreak havoc on shale gas producers will be difficult.


For the short term, the benefit to the global economy looks good. Financially unstable oil producers will suffer. But oil prices at less than $70 per barrel will be a windfall for consumers and businesses, who will put those savings from lower energy costs toward purchases and investments.


Shipping will also share this smorgasbord. Lower bunker prices will help cash-strapped owners and give pricing power to healthy ones. Cheaper oil has already led to heightened import demand, keeping very large crude carrier rates at levels owners have not enjoyed for years.


“The positive market fundamentals for tankers thus just got better,” said research group RS Platou in a note following the Opec move.


The benefit of rising import demand for goods will depend on how long the low oil price persists. Both the person on the street and governments will have more spending power.


Consumption by the former could stimulate appetite for goods in rich countries and increase export demand from Asia. Governments will be able eye physical stimulus packages, conceivably giving rise to heightened demand for iron ore and other commodities. And they will be more inclined to keep interest rates where they are, or retain bond-buying programmes.


Or all of this could be this year’s flash-in-the-pan. Opec could relent, curtail its output as it has in the past, and bring the price of crude to a level comfortable enough to satisfy its more fractious members. That would leave its shale gas opponents free to frack another day.


But even if Opec succeeds in restraining the shale gas industry, it hard to see a scenario in which that industry retreats for long. Its own production costs have tracked downward over time. A relatively young industry, it will continue to find production savings. Fracking is here to stay.


The rivalry between the cartel and outside producers has just begun. That has to be a net positive for the world economy — and for shipping.


This is the first time Opec has appeared in the Top 100, though dominant member Khalid Al-Falih, chief executive of Saudi Aramco, featured in2011,2012,2013and againthis year.


source:lloydslist.com

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