Last week out of the blue, OPEC’s secretary general openly asked US shale oil producers to help the oil organization by coordinating and assisting the oil group in stabilizing the oil prices by managing their production throughputs.
Such a surprise call from OPEC shows that the organization is desperately making an appeal for some sort of collaboration. It knows that such an arrangement will lead to court cases in USA for fixing oil prices. Most judges there would love to have such cases in their courts.
It is a strange call from OPEC. It seems it cannot make its own members adhere to the agreed production cuts and is instead begging the main enemy which had caused OPEC to lose volumes and revenues in the last few years and caused near-bankruptcy for its own members when oil prices fell below the level of $40 per barrel.
On the other hand, Saudi Arabia looked the other way and found a stronger strategic partner. It signed strategic deals with Russia to coordinate its energy policies, being the biggest oil producers and in consideration of their sizes and long-term visions.
Both agreed to intervene in the oil market, should the oil prices slip below the level of $50 per barrel, based on their long term vision of a stable oil price within the range of $55 to $60 per barrel for the next five years.
Of course, such a level will be acceptable for the shale producers, but it will also make oil consumers become addicted to cheaper oil for some time until the demand peaks again and perhaps another level of oil price that is closer to $70 is reached; but this will not happen so soon.
The appeal made to shale oil producers will not be of any good, as they will not respond but will continue to streamline their cost for any level to produce or any price above $45 per barrel. Meanwhile, OPEC will fail to meet the target and will be stuck with the sole dependents on oil and oil only. Without any other alternatives, OPEC will always be at mercy of others.
The new alliance between Saudi Arabia and Russia seems to be the best scenario for cooperation and the best choice for oil stability, as it is aimed at maintaining the oil prices at the current level of $55 and above. They will intervene only when necessary so that the oil prices do not sink much. This is the best answer to today’s market situation especially with OPEC members not keeping to their commitment and producing more than the agreed level by more than 700,000 barrels per day especially by Libya, Nigeria and Iran. OPEC general secretary should address those countries and not the shale oil producers. That would be their response to OPEC’s appeal.
By Kamel Al-Harami – Independent Oil Analyst