OPEC poised for output cut as Saudis bow to U.S. shale

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Saudi Arabia can no longer afford to fight a gruelling war of attrition to force rivals out of the market.

T. Belman. Saudi Arabia and Russia desperately need the price of oil to rise. That gives the US enormous leverage over them to get them to be amenable to US policies. She just has to become an exporter of oil.

Ambrose Evans-Pritchard, The Telegraph

The OPEC cartel is poised to slash crude output after weeks of feverish shuttle diplomacy by Saudi Arabia, halting the “pump and dump” price war that has ravaged the oil industry for two years.

Officials from the cartel’s 14 member states will gather in Vienna today to start hammering out the final details of a deal to clear the enormous surplus hanging over the market.

OPEC talked themselves into a corner and they have to come away from Vienna with something

They have received quiet assurances from the Kremlin that Russia will play its part by freezing production.

“OPEC talked themselves into a corner and they have to come away from Vienna with something,” said David Fyfe, market chief at oil trader Gunvor.

“Prices could easily fall below US$40 again if this ends without a deal. They need to cut by at least 1 million barrels a day (b/d) to eat into inventories in early 2017. But it will be tricky: the Saudi red line is that they are not going to do this alone, and there must be some ‘buy-in’ from the others,” he said.

Yet any breakthrough will come as the U.S. Geological Survey reports vast quantities of cheap shale in the Wolfcamp pocket of the Permian Basin of West Texas, and US president-elect Donald Trump vows to slash costs for drillers and open federal land for exploration.

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The Permian alone could rival the giant Ghawar oil field in Saudi Arabia, ultimately producing 6 million b/d at relatively low cost.

OPEC faces a Sisyphean task. It must learn to live with a permanent threat from agile frackers in North America, who are able to crank output within months at ever lower break-even costs, potentially capping global crude prices at half the level of the long boom years, which ended so brutally in 2014. Brent crude nudged up to US$46.80 last week on optimistic talk from OPEC ministers, though prices are still down 15 per cent since early October.

There have been hints of a loose agreement that lets Iran and Iraq curtail output slightly above current levels, leaving the Gulf states to do the heavy lifting.

“If they are highly disciplined and it doesn’t all fall apart as everybody cheats, prices could climb back up US$60 next year, but that is a very big if,” said Mr Fyfe.

Suspicions abound that several countries are inflating production figures to lock in a higher ceiling.

“Basically, there is going to be a deal,” said Ole Hansen from Saxo Bank. “Shale is now so lean and mean that OPEC can’t count …read more

Source:: Israpundit

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