This Has Never Happened

As you read this, Marina and I are flying out to Seattle for something we do several times a year – spoiling two of our grandkids. The other two live in Germany, which requires its own distinct spoiling campaign.

Now, I regularly serve as the sounding board for a wide gamut of observations from all types of sources. It seems to come with the territory. And as we were traveling to the airport, I was reminded of some very startling rumors I recently heard about OPEC’s oil cap negotiations.

What I’m hearing now suggests that, in addition to another meeting between OPEC and Russia, there is now an attempt to get OPEC and U.S. producers to sit down at the same table.

That’s never happened before.

And that’s not the only reason why these rumors (if true) are so startling…

You see, the reason why this has never happened before goes to the very heart of the U.S. oil industry…

There’s Been No Word on U.S. Involvement from My Saudi Sources

This particular piece of information comes separately from three usually reliable contacts. Of course, in matters like these, it is difficult to determine whether these are genuinely independent sources with access to their own information, or just several mouths repeating the same rumor.

After all, between a World Series and the rising exhaustion of a particularly distasteful Presidential campaign, there is a lot of room to spin tales.

Now, I haven’t heard anything about this U.S.-OPEC meeting from my usually reliable sources in Saudi Arabia or the United Arab Emirates, sources that tend to be “in the know” about such developments. Still, even these sources have been sounding evasive lately.

And that just makes me even more curious.

The rationale for such a meeting is quite straight-forward. The absence of American oil producers in the global conversations leading up to an oil production cap has been like avoiding an 800-pound gorilla in the room…

Tricky, to say the least.

Some analysts considered the initial Saudi-led OPEC move almost two years ago to defend market share and let prices drop, instead of defending oil prices by cutting production, to be directed against U.S. producers of new unconventional crude (shale and tight oil).

But the real target was different…

Russian Oil Exports to Asia Were OPEC’s Real Target

In my view, the more immediate target of OPEC’s move was Russia, and the battleground was the Asian market. This is where the global energy competition has been moving. Asia will be the primary driver of global demand over the next several decades.

By reducing their prices, the Saudis made it hugely expensive for better grade Russian crude to move along the new East Siberia-Pacific Ocean (ESPO) export pipeline for transit to Asia. Turning that pipeline off would remove a primary impediment to continued Saudi/OPEC dominance in the Asian market.

Nonetheless, the sudden rise of new U.S. volume in the market certainly would have changed calculations of supply to meet demand, although it remained indirect at best. That’s because in late 2014 the only real impact rising American production had on global trade was how it affected U.S. import levels.

We had Congress to thank for that…

For 40 Years, U.S. Producers Had Very Little Influence Over Oil

At the time, Congress had still not removed a more than four-decade-old prohibition against exporting oil. There had been some exceptions granted – crude that had been initially processed (usually via preliminary steaming of impediments) and heavy oil from the Monterey basin n California (sold at a heavy discount for which there was not a sufficient local market).

But the vast majority of American production was still not eligible for export.

That changed with a subsequent move by Congress to allow the export of American-produced crude (a law included in a larger bill that averted a government shutdown in Washington). It will still take some time for those exports to have an impact on the broader international oil price.

Still, there was a noticeable lack of an American presence at any of the meetings this year where a production cap was discussed: Doha in April; Algiers and Istanbul in October; the planned upcoming session in Riyadh; and the regular OPEC meeting at its Secretariat in Vienna on November 30 (at which the production cap is supposed to be announced).

In each case Russia, as the primary non-OPEC producer, has been involved. But there has been very little attention accorded to the U.S., for one very simple reason…

OPEC Has No-One to Talk to on the American Side

For a production cap approach to be applied, participants need both a centrally-determined national oil policy to administer it and a national (and state-controlled) oil company through which it can be applied.

The U.S. has neither.

Instead, in what is both confusing and frustrating to other producers, American oil production levels are determined by market factors, as seen by thousands of separate operating companies.

There are certainly U.S.-based major oil companies with an international presence, and there are representatives of energy-related government departments and agencies. But these are not the same thing.

That leaves OPEC with nobody to talk to that has the same kind of central control over production practiced by each of their home capitals.

With production levels of almost 9 million barrels a day, the U.S. is usually ranked at least third in the world, after Russia and Saudi Arabia. Throughout much of 2015, we were second (after the Saudis), and sometimes even first.

So you can see why anyone wanting to restrain global oil production would want to make sure Americans are involved in the conversation. But with the U.S. energy sector being so decentralized, there’s simply no-one for OPEC to talk to.

That’s why I doubt that any U.S.-OPEC meeting will take place. There will certainly be some marginal and more informal conversations between some specific U.S. producers and OPEC officials.

But these will hardly be decisive. U.S. producers continue to march to a different drummer than OPEC, which is one of the reasons for the huge success of U.S. shale oil producers…

And the investment profits that they have, and will continue, to generate.

In the meantime, I’ll keep you informed if I hear anything more about this rumored meeting.

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