OPEC+ Creates Its Own Volatility: Elements By Liam Denning
(Bloomberg Opinion) --
Today’s Take: OPEC+ Creates Its Own Volatility
It seems odd that Saudi Arabia’s energy minister professes concern about volatility; that just goes with the job title, surely? Also, oil-price volatility has actually eased from the heights reached earlier this year — sparked by the brutality of Saudi Arabia’s main OPEC+ partner, Russia.
Downward oil-price volatility, it seems, carries less legitimacy with producers than its upward cousin. Prince Abdulaziz bin Salman’s threatened OPEC+ supply cut may also be aimed at US efforts to revive the Iran nuclear deal. Either way, it served as a reminder that OPEC’s commitment to its mission of “stabilization of oil markets” is, shall we say, volatile.
Even before its “+” incarnation, OPEC consisted of a few capable VIPs with an entourage of stragglers. July’s target “compliance” of 523% — a figure that verges on performance art — speaks to this structural weakness. Of the 18 members tracked by the International Energy Agency, just three are producing close to their peak and with some to spare, accounting for 43% of total capacity.
Another 30%, however, is in countries whose output peaked more than a decade ago, with a collective decline since those peaks of almost 14 million barrels a day. A further 21% is in Russia, whose war drew sanctions that will ultimately cap production and may spur outright decline.
Like Russia’s self-inflicted damage, the overriding issue isn’t geology. For example, Venezuela and Libya both have 300 years-plus of oil reserves at current production, but their political decay has rendered such numbers almost imaginary.
With fears of recession elevated and oil stocks set to rebuild for several quarters, OPEC+ needn’t necessarily add more supply. Yet actually , with oil around $100 a barrel, inventories below average and its second-biggest member roiling the global economy with war, would be a radical step, absent some immediate flood of Iranian barrels.
If the prince just wants high prices or to send up a geopolitical flare, fine. But in lamenting instability, he might consider how much of that owes to the crumbled foundations of the oil market’s self-styled bulwark.
Even as US hot-rolled steel prices have dropped 60% from last year’s peak, the price of oil country tubular goods, or OCTG — well-casing and pipes — has been on a tear as drilling and completions pick up from the lows of the pandemic. Oil prices have more than doubled over the past two years but the cost of benchmark P110, 5.5-inch steel pipe has almost quadrupled. Looking ahead, inventories remain tight, signaling higher costs for the industry.
Today’s Top Stories
UK households will pay almost triple the price to heat their homes this winter compared with a year ago — the equivalent of £3,549 ($4,189) a year — a jarring increase for millions of people already struggling to afford everyday essentials.Things could get scarier still in Britain this winter. In his column today, Javier Blas reports on the alarming questions energy traders are asking Britain’s energy network about possible supply outages in the coming months.In Germany, the parabolic rise in power prices continued with benchmark year-ahead prices surging past 800 euros a megawatt hour on Friday, almost 10 times the price a year ago.Beyond Europe’s energy crisis, one of China’s most influential commodities traders is seeking government aid to shore up its finances, in the latest sign of how a sagging economy is squeezing the country’s private sector.And China is using two massive drones to seed rainclouds in Sichuan province to try to end a devastating drought that has choked power output and disrupted supply chains of global giants like Apple Inc. and Tesla Inc.
Best of the Rest
- An editorial in the Wall Street Journal cites a letter from US Secretary of Energy Jennifer Granholm imploring refiners to limit fuel exports as America ships record amounts to Europe.
- Russia’s invasion of Ukraine has thrust security back to the top of the energy agenda, where it sits uneasily alongside climate change. A short new report from the Center for Strategic & International Studies posits a postwar energy strategy to address both imperatives.
- Texas’ state committee on the future of its electricity grid, which hosts a lot of renewable power, has a curious lack of anyone with experience in renewables, writes Russell Gold at Texas Monthly. Actually, there is one person; he raised the question of whether wind turbines can change the Earth’s magnetic field (spoiler alert: “No way.”)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.
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