THE NEW OPEC & THE NEW SWING PRODUCER
OPEC is no more an oil price control cartel or The Global Swing Producer, the new Swing Producer is called "SHALE OIL."
OPEC is today a market leader that has an interest in the long term health and stability of the oil and energy markets and the global economy. It has an interest in maintaining stable long term customer relationships in both crude and downstream products and in keeping its upstream, downstream and distribution network efficiently occupied.
As such, the further OPEC invests in its upstream/downstream, distribution, marketing and logistics network, the more difficult and expensive it is to cut back production. That plus the fact that its core members are some of the world cheapest producers, has made OPEC revise its role from "Oil Markets Price Controller & Protector," to a "club of lead players interested in the long term interest and health of the oil and energy markets."
This not well understood new and evolving role for OPEC coincides with another new development in the oil markets, the entry of "SHALE OIL", explored and developed primarily by small and medium size private ventures and financed by private capital and the financial markets. This oil (primarily produced today in the USA and Canada) is the most expensive source of oil and is totally dependent on maintaining financial viability (price and cash flow), and the willingness of capital markets to finance it. "Shale Oil" requires continuous investment in drilling of new wells to maintain production levels, as wells lose 50% of their capacity in 12 months hence a field where no new drilling is done will be 50% down in 12 months and stop production in 24 months as opposed to conventional wells that lose about 15% of their capacity annually.
This makes this new free market produced oil the "New World Swing Producer." A producer that is sensitive to market developments, it can shut down quiet fast (24 months as opposed to 7 years for conventional well) and is able to ramp up production quiet fast as we have seen in the last few years.
OPEC and the financial markets are still adjusting to this new reality with some players accepting it faster than others. OPEC "Primarily via its GCC" members has begun signaling the markets (primarily to the financial and capital markets) this new reality. OPEC has a new vision to its role and cutting production or protecting prices is not among those and that it's the duty of the most expensive oil to exit when not needed and the market is starting to listen and understand the changing rules of the game.
This clip of Goldman Sachs latest released statement on oil markets, dated 12 January 2015, says it all:
"We forecast that the one-year-ahead WTI swap needs to remain below this $65 a barrel marginal cost, near $55 a barrel for the next year to sideline capital and keep investment low enough to create a physical re-balancing of the market,” the bank said.
Goldman doesn’t expect that Saudi Arabia or other core members of OPEC will cut production, "versus its previous expectation that the group would help balance the oil market" in the second half of 2015, according to the report.
“This is anchored on "our expectation" that the "slowdown in U.S. shale oil production" in second-half 2015 will be sufficient to clear the market overhang and the threat of capital being quickly redeployed to restart U.S. production growth,” it said.
This Goldman Sachs statement says it all, as capital markets and the small and medium size operators in the Shale Oil sector start to understand the new rules and the risk and rewards associated with those new rules of the game, they will require a premium possibly up to 20% or more at the start of a production ramp up for them to invest and be ready to cut back when market is sufficiently supplied.