Price Disagreements Within OPEC?

Late last week, I wrote a post titled ‘The Rise of Propane Production: The Sequel’.  We have seen a strong increase in propane production over the past year and I laid out a case as to why we may see that trend continue.  My thoughts were centered around the opinion that Saudi Arabia would continue to push for crude oil production quotas within OPEC, as to not send the supply and demand balance out of kilter again, to keep oil prices higher…which would give American based producers the opportunity to capture more global market share and the wheels of production would remain robust, as would propane production.

One of the factors I wrote about was the fact that the Saudi’s will want to keep crude oil prices at a strong level, or rather, at levels between $60-$80/bbl in advance of the launch of their Aramco IPO.  The sale of a portion of the kingdom’s oil production industry, which is what Aramco basically is.

This article in yesterday’s New York Times suggests the Aramco Public Listing could now be delayed until 2019.

So we have the Saudi’s with a possible longer-term launch horizon on their IPO, which could in turn lead to them wanting to keep the OPEC quotas/limits in place for the rest of this year and into 2019.  However, as this Wall Street Journal article from March 11th discusses, there are other OPEC nations (namely Iran) who would rather see oil prices dip a bit to push some pain into American Shale production, and recapture some of that global market share for themselves.

From the linked item:

OPEC is breaking down into two camps after more than a year of unity. On one side is Saudi Arabia, which wants oil prices at $70 a barrel or higher, and on the other is Iran, which wants them around $60.

The split is driven by differing views over whether $70 a barrel sends U.S. shale companies into a production frenzy that could cause prices to crash. At stake is the Organization of the Petroleum Exporting Countries’ production limits, which are among factors helping the oil market’s monthslong recovery.

Iran wants OPEC to work to keep oil prices around $60 a barrel to contain shale producers, Oil Minister Bijan Zanganeh told The Wall Street Journal in a rare interview. That is a little below Friday’s prices of $65.49 a barrel for Brent crude, the international benchmark, and $62.04 in the U.S.

“If the price jumps [to] around $70…it will motivate more production in shale oil in the United States,” Mr. Zanganeh said. Shale producers are more nimble than big OPEC producers, using techniques that allow them to increase or decrease production depending on the oil price.

The entire article is worth reading, but this is a key dynamic to consider.  If there becomes a schism between the Saudi’s and the rest of OPEC (along with Russia, who has been working with OPEC on cuts), the Saudi’s would have to choose whether to bear the burden of the supply and demand balance themselves, or give in and just pump more oil.

In the article I linked on Friday, I had a graphic that showed the break-even oil price level for various nations, dated Summer of 2017.  Here is an updated graphic, from International Monetary Fund (IMF)

Libya is at $102
Saudi Arabia: $73
UAE: $68
Iran: $57
Iraq: $56
Algeria: $55
Kuwait: $47

From the article, Iran is more keen on kicking up production and keeping market share away from American producers, more comfortable with oil around $60. As you can see, their break-even price is $57, so they are talking their position.

Then there is this to consider, from the Wall Street Journal item:

If oil prices averaged $70 a barrel next year, it would result in an additional 600,000 barrels a day of U.S. production compared with $60, said Artem Abramov, vice president for analysis at Norwegian consultancy Rystad Energy.

The International Energy Agency said this week that shale production had already risen so much that demand for OPEC crude would remain below the cartel’s current production through 2020. That could pressure the group to limit output for longer than most members anticipated.

These are fascinating chess movements to consider, moves that will have some kind of impact on propane prices for the coming year.

Jon Miller
Marketing Representative for NGL Supply Wholesale in Tulsa Oklahoma. Follow me on twitter @PropaneBuzz

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