A feared worst-case scenario of open conflict breaking out in the Gulf region between Washington and Tehran appeared to be buried on Tuesday, as the OPEC+ alliance agreed to extend oil production cuts through March 2020.

The decision, taken by oil kingpin Saudi Arabia and non-OPEC heavyweight Russia, followed a string of potentially destabilizing events in and around the Strait of Hormuz, through which 20% of the world’s oil supply passes.

A June 13 attack on two tankers laden with petroleum products was widely viewed as an Iranian warning to the Gulf monarchies of the consequences of crippling its oil exports. A week later, Iranian forces shot down a US drone which Tehran said was flying over its airspace. In the wake of that event, President Donald Trump said he came to

Following a slight spike in oil prices,

“The geopolitical concern is behind us. We’re over with that for the time being. There has been no other major event. We’re in the driving season in the US so oil going down rather than up. Season where you see an uptick in demand so it’s very important they took that decision.

 

An alliance of OPEC and non-OPEC states, led by Saudi Arabia and Russia, agreed on Tuesday to extend oil production cuts for another nine months, signaling that the global heavyweights

kingpin Saudi Arabia and its ally Russia have

 

 

Questions for Manouchehr: independent analyst (international oil and energy consultant baseds in london) former senior staff of OPEC secretariet in Vienna 1981-1990 when oil price collapsed

What do the production cuts mean for Saudi? For Iran? For US shale?

This was expected. It was a so-called rollover. Everyone expected it. Whole market has discounted for it. It has included OPEC as well as Russia as well as non-OPEC to it has been working and people were happy. little minor problems in the procedure and the way Saudi and Russia in outside OPEC meetings meet each other or as Putin mention in the G20 to the Crown Prince that he’s in favor of extending the deal. Some OPEC ministers are unhappy but this is not one man, one country. But in general everyone agreed they should keep the agreemend to have 2.2 million (check) a day.

This was an expected result that OPEC and Russia and others will continue the agreement they have

The US shale oil and gas has been a thron in the side of OPEC for the past five six years. a source of great increase the amount of oil addedd ecvery year to US production through shale oil have been tremendous. i think 4-5 million per day have been added to US production for the past four years/ five.

All the experts were assuming the US production would decrease. Production had fallen by the mid-200s. But this technological revolution has brought more oil into the world market which was surprising to many.

Shale oil and gas, this technique of drilling through shale rocks, shale is a source rock. Oil is generated from organic rich material trapped at the bottom of the oceans in the sediments and after so many thousands of years they crack and generate oil and gas. What was new was that people used to think this source rock, the mother layer, wouldh ave generated all this oil and gas. It was a technological breakthroughs in horizontal drilling, started in the 1980s, together with the fracking, fracturing the shale which resulted in this gas, then oil. That was a big breakthrough. the big companies didn’t go for it. It was the smaller companies more aggressive willing to risk and use new technologies. that’s why texas, which was a source of oil for more than a century and a half where these small companies managed to find oil and gas. so this exxon exec is looking on as these little companies are drilling.

Gas is easier to get out of the rocks from the deepths than oil.

It took by surprise even Exxon and other major companies. Then they joined and bought some

That has resulted in US running down to 5 mill per day to about 11. This competitor for OPEC oil made OPEC countries try to do something. Because it’s a big supply competing.

Part of the strategy of OPEC they thought if they reduced the price then the shale oil might not be competititve. I remind you this shale oil story began when oil was $120 per barrel. they had good revenue to take risk and use these new methods. So OPEC thought as part of supply-demand balance to increase the supply of oil in late 2014 – 2016, so oil that was $110 to $40-30 per barrel. OPEC thought this collapse in the price would make these shale producers go out of business. Many lost a lot of moeny, but science and technology cannot be put out. They continued with innovative methods, and operationally they became gradually more efficient. so they managed instead of $110/20 pb manage a lower price. Of course many went backrupt but many continued. And those bought by Exxon had stronger financial muscle could put more money in research. So shale is more competitive and break even price which used to be $80 or more is now much lower.

Shale oil is not going out of business in spite of price coming down. Break even some can manage at $40. Some might still require $60. But still a lot of shale oil still coming onstream.

More academic debate on how long can shale continue producing, how high could shale go. People thoguht it would only be a few hundred thousand bpd, now it’s several million. How how can it go, and for how long?

when the ministers sit together it is the very broad policy level they discuss. They are looking at supply and demand for the coming months. What is the expected additional oil coming out of US shale in the next six months, how much new oil out of Canadian Rockies, how much from Brazil, how much from North Sea in Norway? What is the demand, which depends on the global economy, which is a bit negative. So they see the prospect for demand is a bit weak. But there are other parts where supply is limited, not by supply and resources, but politics. Upheaval, politics have put part of supply out of world market: Venezuela, supply has fallen, not even enough for domestic. Iran has fallen. These are US sanctions and civil wars, say in Libya and Nigeria, Niger Delta, clashes between locals and others. So you see supply of oil is being affected by all these factors.

In the past few years Shale production has become mature, efficient, and it is not like the first two-three years which required $80-100 a barrel to become profitable. They are looking at realities. The conventional oil, if company spends $2 billion dollars for a platform, they will continue production even if price goes down because it’s a sunk cost. OPEC in competing with those producters, they know threy cannot beat them, or have to wait and continue. But shale oil wells take a month or two to drill (as compared to years for offshore) and the oil production from that well for a year or two is a relatively good rate, but after that shale production from those wells gradually falls. Then you have to dig another well. So it is a short lead time rather than five year lead time. So shale oil is flexible. But then it goes higher.

“I have no doubt in my mind that U.S. shale will peak, plateau and then decline like every other basin in history,” — of course it is true. there are fields that go on 40-50 years in Saudi. but these shale oil fields declien. There is a limit in shale oil prospects. The resrouce is not unlimited. but i woudln[t say it can runout like othe rfields. but prospects are longer than other oil fields. generally normal conventional oil fields usually decline after 4-5 years. but shale oil there are thousands of wells. and they are flexible, they can drill more wells. the resource is huge but a lot of studies required to study it. there might be sweet spots but others flow less. What he said is true but with a pinch of salt. one day it will go down but it has been growing for past 10 years and forecasts are it will keep growing or at least remain flat in the early 2020s. even dept of energy own forecasts are it will grow up to 2021. 

thinking in five years time anything can happen, any technology. amazing how much technology innovation can change. shale can continue much longer than ministers in OPEC wish.

But OPEC ministers have done very well, the way they managed to bring Russia.

The meeting was expected had been discussed and there would be a rollover, but some comments at G20. I meant Iran. This is natural for Iran and the minister to be unhappy and I think Saudi and Russian sides should have been a bit more diplomatic. At this time with the impot role of Russia being part of this call, Russia is impt, but in general world market and conditions change go up and down and they should continue this more democratic decision making rather than making bilateral with two biggest trying to make decisions for all of them.

But what the Iranian minister said is expecfted. If you’re a member of a club since 1960, there have been crises, world recession in 2008, and this club of countries have managed by cooperation, dsicussion and so on. And there have been high times. But it has been this togetherness transparency among OPEC members that a small country like Ecuador, Indonesia when it was a member, the 60 yr history small and large producer. When they got together they used to discuss and one country was one vote. It wasn’t that Saudi produdced 9 and Algeria 1.5 mn and they were diplomatic and listened to each other. It wasn’t that Saudi would ignore Algeria. Venezuela. It was the language and announcements in the public. but there have been these tensions in the past.

Teh Iranian minister is unhappy with this undiplomatic decision making. It might be a good idea to do a little discussion with colleauges. In pracftise Saudi and Russia are the big players, the kingpins. Saudi for OPEC and Russia the kingpin for non-OPEC. that az and others will follow. But on both sides they should be a bit diplomatic that we will discuss with our colleagues. not announce in advance.

At the OPEC meeting yesterday i think they had 4-5 hours meeting even though it was very simple. danger of US Chinese trade war. OPEC countries say this 1.2 not sufficient. Some will say lets cut now because the price should be higher. Do they want to just react to Trump sanctions.

These things have happened before. When I was working in OPEC in Vienna it was heat of IRan-Iraq war. and yet the minister from those two use to come to Vienna and they would talk to each other. They would not hug but they would have serious discussions together. Around the table they continued their negotiations and exchanged views. Now political tensions i don’t think it’s anything serious. I think OPEC will survive because it’s good for all of them. They’re all in the same boat. If one leaves they will all lose. That’s why Russia joined. Then you get to a more philosophical question, should it be laissez faire, or more controlled. The US president today said it has to be free market, whereas in the US itself they control production and still have TExas railroad commission, where the company gives quotas. Two years ago state of Alberta gave quotas to its own producers to defend the price. This regulating the market is a reality. and anyway for decades the oil companies used to. The seven sisters in 1928 in Scotland the question was how to regulate the price. Rockerfeller. US says OPEC has to be punished, but under Clinton his oikl guy lobbied OPEC to do somethign to get the price