The jawboning of oil prices by the Saudi Arabian/Russian tag team should be wearing off after more than a year of actions that don't measure up to the words. Oil prices slumped recently, dropping from around $54 per barrel to just below $50 as of Friday's close.
As if on cue, the Russian energy minister announced Friday that Russia has now met its target of reducing oil production by 300,000 barrels per day. It only took four months to do something that should have taken just weeks. (The agreement came into force on January 1.) And, of course, we'll have to see if the Russians have actually done what they say they've done.
Only a week earlier, the Saudi energy minister indicated that there is momentum growing in OPEC for extending production cuts beyond June for another six months. This announcement comes only six weeks after the same minister said that OPEC would NOT be considering extending the cuts. This is reminiscent of last year's run-up to the production agreement in which Russia and Saudi Arabia kept alternating in making often contradictory announcements to sow confusion about the possibility of a production agreement and keep markets on edge without actually having to do anything.
I continue to question the sincerity of Saudi Arabia and Russia who I believe remain committed to undermining the production of tight oil (shale oil) production in the United States. Despite the cuts agreed to for this year through June, the March numbers just in suggest substantial non-compliance among non-OPEC signers of the production agreement and a reminder that major producers Libya, Nigeria and Iran have been exempted from cuts. Do Saudi Arabia and Russia really want prices to rise enough to make tight oil profitable all across the United States (and not just sweet spots in the Permian Basin)? I'm not convinced.
The Saudis and the Russians want to appear to being "doing something" about low oil prices. But they and their fellow producers aren't really doing enough to push prices higher. And, that may suit the Saudis and the Russians just fine.
Meanwhile, U.S. tight oil producers keep touting ever lower "breakeven" prices for their relatively expensive oil. But as petroleum consultant Art Berman has been pointing out for some time, these lower breakeven prices are almost completely the product of crashing oil service costs rather than technological miracles. And, they aren't limited to tight oil producers, but rather reflect conditions across the entire industry.
The oil service companies and equipment fabricators are faced with depression conditions and have slashed prices to keep some revenue coming in and maintain market share until the next upturn. Pricing for services and oilfield goods is dynamic not static. When conditions improve, costs will rise accordingly and so will breakevens.
One thing all this talk has done is fan speculative interest in the oil futures market where open interest has soared even as prices have traced out a mostly sideways pattern. Clearly, many speculators believe the hype about sharply higher oil prices. I believe they are going to wait quite a while longer--at least until Saudi Arabia and Russia are satisfied that the investment capital flowing to tight oil drillers in the United States has been largely shut down.
At some point low investment worldwide in oil exploration and development will start to make a significant dent in world supplies. Remember: depletion never sleeps. But the world economy may be softening; in its most recent Oil Market Report, the International Energy Agency revised oil demand growth downward in response to slower worldwide economic growth. That suggests that the expected uptick in oil demand growth may not materialize for some time, keeping investment generally low.
The longer investment remains low, the bigger the oil price spike will be when it does arrive in response to shrinking production capacity, rising demand or both. The oil bulls will eventually be right. But will they hang on long enough to enjoy their vindication?
Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at firstname.lastname@example.org.