Why OPEC is stuck in the middle this week — and beyond
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Even if Thursday's expected OPEC+ decision to delay adding barrels lasts only a few months, it's a sign of longer-term hurdles facing the cartel.
Why it matters: Tepid demand growth and rising output outside OPEC+, including U.S. shale, is forcing tradeoffs between trying to prop up prices and regain market share.
- How the coalition responds ultimately affects U.S. consumer and business costs.
Catch up quick: OPEC+ has repeatedly delayed starting the phased, incremental return of 2.2 million barrels of production.
- It's expected to kick the can down the road again Thursday, reportedly by three months through Q1.
What we're watching: Let's turn things over to Bob McNally of the Rapidan Energy Group, which estimates that OPEC could face several years of trying to manage oversupply before the market tightens up.
- Depending on how much they need to withhold, Rapidan doesn't rule out the group changing course and instead tolerating a period of low prices "to sweat U.S. shale and other higher cost competing producers," McNally tells me via email.
"We may not be there yet, but this moment of reckoning looms, unless there is a major disruption due to sanctions or conflict," he said.
The intrigue: President-elect Trump's arrival could shake things up in several ways.
- One is if stronger sanctions pressure on Iran slashes its exports. Rapidan sees Iranian supply falling by 500,000 barrels per day and potentially more. This would "help solve OPEC+'s oversupply problem," McNally notes.
- But Trump's trade policy, notably tariff pressure on China's fragile economy, are a downside risk to oil demand, he said.
What they're saying: Bloomberg's Javier Blas points out that U.S. shale producers' growing efficiency means even Brent prices as low as $70 per barrel won't stop growth.
- Eventually, he writes, geology will, but "that day hasn't arrived yet."
- "The longer OPEC+ pushes for too high prices, the deeper the hole it digs for itself, unable to increase production," he writes.
The bottom line: "The challenge is that the group needs to find a balance between trying to support the market and limiting its loss in market share," ING analysts said in a note this week.
