01-Faulkner-Commentary-faulkner-chris-favorite_small

OPEC’s December Meeting Will Have To Address Financial Woes

OPEC’s dominos keep falling with nary a hint of a budge from the policy that sent oil prices tumbling last year, and now, OPEC’s internal discord is at its highest level since 2011. That’s when the 12-member cartel bickered all year before Saudi Arabia obviously played their strong card, forcing their 30.3 million barrel per day output plan. Unfortunately, the quota still stands, but really it doesn’t, because none of the members adhere to it.

Saudi got hit in the face with a brutal slap last week when Standard and Poor’s downgraded the country’s sovereign debt due to low oil prices. Judging from Saudi’s quick reaction, blasting S&P for “rushing to judgment,” the news apparently came as a surprise and was obviously unwelcome. The ripple effect could lead to gradual re-pricing at lower levels.

When OPEC convenes December 4 in Vienna, not only will Indonesia take a seat at the table, but there will likely be more behind the scene scowls rather than smiles this time around. Considering how each (current) member nation is lining up, it appears to be more of a David and Goliath battle between the haves and the have-not’s.

Saudi Arabia, the United Arab Emirates, Qatar and Kuwait are all on the side of continuing status-quo, obviously allowing the financial chips to fall as they will, relying on their mammoth war chests to weather their self-created storm.

Iran, Venezuela, Nigeria and Algeria are all clamoring for a price floor somewhere in the $70s and a return to a quota more reminiscent of the 1980’s, when a number had more meaning than it does today.

Ecuator, Angola, Libya and Iraq are quieter about the situation, but obviously would relish higher prices and any attempt to take production off the market. Libya seems to be the only member who periodically contributes to lower production when rebel fighting affects oil fields and ports, as it did again this week with the closing of the Zueitina Port, threatening most of its 430,000 barrel per day shipments.

Although not an OPEC member, Egypt’s financial woes continue, as the nation reported burning through $16 billion of financing it received from its Gulf supporters. With only $12 billion remaining in surplus, at the current burn rate, observers are wondering if an Egyptian default could be around the corner, and whether its Gulf allies can provide more, given their own dismal outlooks.

Next, enter Russia and their new post-Soviet high output of nearly 11 million barrels of oil per day. Obviously, Vladimir Putin believes the best way to make more money is to oversupply the market, not the opposite.

This is almost like a runaway train to nowhere. Every man for himself. The Saudi objective to tap down US shale has already had its impact, and from here, there’s not much more affect they can have. Shale has been more than validated, and once prices go back up around $70, output in the US will pick up briskly. Saudi should accept the fact that is not going to change.

The best solution, if there is a diplomatic one, would be for OPEC and Russia to agree to throttle production a small amount, sending prices back into the mid-seventies. That could be done virtually overnight. Simply an announcement would move the market dramatically. If OPEC would simply hold to its 2011 quota and Russia would return to its previous output of approximately 10 million barrels per day, that would remove nearly 2 million barrels of daily supply, certainly enough to move the market.

Instead, Saudi Arabia has virtually single-handedly positioned half of OPEC on the brink of financial disaster, they are spending cash that took them decades to amass and seem determined not to make the one move that could return oil prices to a level that works well for everyone.

It just makes no sense, and appears to be getting worse.

Written by: Chris Faulkner, Breitling Energy CEO, Chairman and author of “The Fracking Truth: America’s Energy Revolution”