Which Price War Is OPEC Actually Fighting?

All of us are aware of the decline in oil and gasoline prices that started late last year and promises to continue well into 2015. Reasons for the drop is attributed to declining demand from recessionary trends in parts of Europe as well as China and developing countries and general over world production. Under the normal oil price cycles, OPEC would be having a cartel meeting and decide to reduce production to bolster per barrel prices at their preferred level. But they aren’t doing that this time and continue to maintain the over supply of oil on the world market…letting the price continue to free fall to where no one knows. From a Bloomberg article titled: “How OPEC Weaponized the Price of Oil Against U.S. Drillers“:

If there ever was doubt about the strategy of the Organization of Petroleum Exporting Countries, its wealthiest members are putting that issue to rest.

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want — and are achieving — further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

The faster you bring the price down, the quicker you will have a response from U.S. production — that is the expectation and the hope,” said Jamie Webster, an analyst at consultants IHS Inc. in Washington. “I cannot recall a time when several members were actively pushing the price down in both word and deed.”

OPEC won’t reverse course even if oil prices fall as low as $20 a barrel or non-OPEC countries offer to help with production cuts, Saudi Arabian Oil Minister Ali Al-Naimi said in an interview with the Middle East Economic Survey on Dec. 21. The kingdom may even bolster output if non-OPEC nations do so, he said. The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.

Now the big boys are claiming that OPEC is gunning for US fracking interests. And certainly this is having a major effect on US producers and if the price decline continues for a prolonged period, new exploration and new wells may certainly go into hiatus. But it seems to me that if US frackers were the main target that they wouldn’t have waited until the summer of 2014 to fight back…they would have tried to nip the nascent industry in the bud long before now.

But there may be two other oil producing targets that OPEC may not want to talk about it…and claiming US producers are the enemy is safe because the US is unlikely to do anything about it…after all US production is aimed at energy independence and not controlling the world oil market (well at least in public that is).

One is the resurgent Russia which is supporting a number of sketchy players in the middle east, primarily Iran…but the emirates can’t be happy about increased Russian military activity in Ukraine and Crimea either. And the Russians are a soft target now that they are already in decline due to international financial sanctions. Every dollar drop in oil prices has to be costing them some real money. News reports suggest that some of their major banks and industrial leaders are on the verge of bankruptcy. A little push in lost revenues may cause Putin to pull back a bit.

The other target might actually be the Islamic State which has been supporting parts of its operations via black market oil sales from captured wells in Iraq and Syria. As legitimate oil markets sink, black market oil has to sink even further and at some point may not be even worth dealing with…no profits…or at least not enough profits for the buyers to take the risks. Another easy way to take on IS without a public commitment of arms and troops and publicity. It would be easier to just bankrupt IS as well!

But that’s still supposition on my part…OPEC still is accusing the US of over production and frackers have to be taken off line:

The United Arab Emirates said on Tuesday that OPEC will no longer move to shore up crude prices, arguing that rising North American shale oil output needs to be curbed.

World prices have been falling since June but the pace of the slide accelerated in November when the Organisation of the Petroleum Exporting Countries (OPEC) decided to maintain its production unchanged at 30 million barrels per day.

Analysts say that richer cartel members like the UAE have been ready to accept the price fall in the hope that it will force higher-cost shale producers out of the market.

“We cannot continue to be protecting a certain price,” UAE Energy Minister Suhail al-Mazrouei said.

“We have seen the oversupply, coming primarily from shale oil, and that needed to be corrected,” he told participants in the Gulf Intelligence UAE Energy Forum in Abu Dhabi.

Mazrouei said the UAE remains “concerned” about balance in the oil markets but “cannot under any circumstances be the only party responsible,” in reference to rising output from non-OPEC members.

Oil producers outside the cartel should be rational about their output, he said, adding that current prices are “not sustainable” for them.

“We are telling the market and other producers to be rational, to be like OPEC and look at growth in the market,” Mazrouei said.

He said that if OPEC had opted to cut production, other producers would have stepped in to make up the lost output and the cartel would have lost market share without any effect on prices.

Mazrouei said current prices were “not sustainable,” particularly for producers outside the Gulf region.

In the meantime don’t run out and buy a new SUV, the President advises against it:

But President Barack Obama is warning Americans that this won’t last forever.

In an interview with The Detroit News’ David Shepardson, Obama said Americans should use the savings wisely.

“I would strongly advise American consumers to continue to think about how you save money at the pump because it is good for the environment, it’s good for family pocketbooks and if you go back to old habits and suddenly gas is back at $3.50, you are going to not be real happy,” Obama told The Detroit News.


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