(The opinions expressed here are those of the author, a
columnist for Reuters.)
By John Kemp
LONDON, March 9 The Organization of the
Petroleum Exporting Countries (OPEC) and shale producers have
fought each other to a draw over the last two years, with
neither able to achieve a decisive victory. Now both want a
There have been no winners from the oil producers’ civil war
of 2014-2016, except for consumers, who have enjoyed two years
of cheaper fuel prices.
OPEC members are running out of money and need higher prices
to reduce their budget deficits and halt the slide in their
And for all their bravado, shale producers and the entire
U.S. oil supply chain have been badly wounded and rescued by a
rise in prices largely engineered by OPEC.
The bad-tempered exchanges between OPEC and shale chiefs
that characterised 2014-2015 have given way in 2016-2017 to a
recognition that their prosperity is tied together.
OPEC and the shale industry are interdependent. Both lose if
they raise output too much, flood the market with more oil than
can be consumed, and cause prices to crash.
Shale firms need OPEC to succeed in reducing global oil
stockpiles and raising prices. And OPEC needs shale producers to
be cautious in growing output to avoid undermining its policy of
The warmer relationship between OPEC and shale firms on
display at the CERAWEEK conference hosted by IHS Markit in
Houston this week has been building for some time.
OPEC's secretary-general said at the conference that the
organisation had "broken the ice" with shale oil producers and
hedge funds who have become major players in the market.
Harold Hamm, head of one of the largest U.S. shale
producers, said that industry would need to add output in a
"measured way, or else we kill the market", suggesting no new
dash for growth.
OPEC’s primary challenge in attempting to manage oil prices
has always been that it controls only a minority of global
output (“OPEC and other commodity cartels”, Alhajji and
OPEC’s attempts to act as a market manager and price
stabiliser have been repeatedly undermined by the development of
supplies in countries outside the organisation.
High prices encouraged development of new resources in the
Soviet Union, China and the North Sea in the 1970s and 1980s,
and the shale plays of North America in the 2000s and 2010s.
In a bid to enhance its market power and share the burden of
market balancing, OPEC has periodically attempted to reach
understandings with other producers outside the group.
In 1985-1986, OPEC and Saudi Arabia attempted
(unsuccessfully) to reach understandings with the United Kingdom
and Norway to lift North Sea oil prices and curb production
In 1998-1999, OPEC reached out (with mixed success) to
Mexico, Russia, Norway and Oman to secure their agreement for
coordinated output cuts to drain excess global oil stocks and
And in 2016, OPEC assembled a coalition of 11 non-OPEC
countries, including Russia, Mexico, Kazakhstan, Azerbaijan and
Malaysia, to coordinate OPEC and non-OPEC output cuts.
Saudi Arabia’s oil minister Khalid al-Falih has described
the agreement between OPEC and non-OPEC producers reached in
December 2016 as a “cooperative framework”.
“All of us realise that such an expanded network of
producers with a larger share of global production is the only
way to achieve a constructive, stable market for all,” Falih
told oil executives in Houston this week.
OPEC has also been briefing and consulting with hedge funds
and physical oil traders to get their views on the
supply-demand-price outlook and gauge their likely reaction to
various potential supply policies.
OPEC’s interest in courting hedge funds and physical traders
marks a recognition of the powerful role they play in moulding
expectations and driving futures prices in the short term.
OPEC, led by Saudi Arabia, has engineered a huge turn around
in hedge fund views from bearish to bullish since September 2016
(“Saudi Arabia engineers big shift in oil market sentiment”,
Reuters, Dec 14).
Hedge funds have accumulated a record bullish position in
crude oil futures and options equivalent to more than 900
million barrels, which has helped push prices up by more than
$10 per barrel since November.
In the past, OPEC has often blamed speculators for causing
price volatility, but the organisation is now anxious to
cooperate with them to help achieve higher and more stable
Even more ambitiously, OPEC seems to want some form of
understanding with shale producers based on their mutual
interest in avoiding another price collapse. The organisation
says it wants an "energy dialogue" with the United States and
sees it as a "strategic partner in the rebalancing process".
But there are strict limits on how far shale producers can
be co-opted into a system for managing the oil market and
U.S. shale production is dispersed among dozens of companies
which makes coordination with them exceptionally difficult
because of the free-rider problem.
More importantly, under U.S. law shale companies are
forbidden from attempting to coordinate production and prices
among themselves or with OPEC.
There are severe civil and criminal penalties for sharing
information about future output and prices let alone any attempt
to divide market shares among producers (“The Antitrust Laws”,
Federal Trade Commission, undated).
Even attempts to reach informal “understandings” among
producers about the current and future state of the market are
The Sherman Antitrust Act imposes criminal penalties of up
to $100 million for a corporation and $1 million for an
individual, along with up to 10 years in prison.
Shale producers cannot partner with OPEC to help manage oil
supplies and prices -- even if both sides were interested in an
More generally, the same antitrust prohibitions prevent OPEC
from partnering with the major international oil companies to
manage the development of offshore and other oil supplies.
OPEC members, shale producers and the rest of the oil
industry would all like to see a further rise in oil prices and
avoid another crash.
OPEC members and Russia are loudly extolling the benefits of
“compliance” with output cuts agreed in late 2016.
Shale firms are pledging to maintain their own financial
“discipline” in expanding production and avoid flooding the
market or developing unprofitable new oil wells.
And hedge funds and other investors have become enthusiastic
cheerleaders for compliance, discipline and higher oil prices in
the medium term.
But there is no legal way for OPEC and shale producers to
cooperate to achieve their desired outcome; they are doomed to
continue with the same cycle that has characterised the industry
since its inception.
(Editing by Edmund Blair)