Even When OPEC Wins, It Loses

For months, the oil cartel OPEC has worried about what it should be doing as its plan to restrict its collective crude production (and hopefully kick off a price rebound) was failing. The cartel has never seemed less cohesive than it does in this new oil reality, where production is surging from non-conventional sources and suppliers, and prices are trading at less than half of what they were just a few years back. That lack of cohesion has been evident in the way so many of OPEC’s members have exceeded the limits placed upon them as part of the attempted market intervention.

For some petrostates, like Libya and Nigeria, this was a matter of course as they work to recover from significant supply disruptions, but for others like Ecuador it was about open defiance of a painful plan to pursue when crude is barely fetching $50 per barrel. But even Saudi Arabia, OPEC’s leader and by far its most prolific producer, has slacked in 2017 in its commitment to reducing production. Back in June, the cartel collectively met just 78 percent of the cuts it promised. The message that sent was clear: cutting supplies was too painful a task for the already cash-strapped petrostates.

But in August, for the first time in four months, OPEC finally managed to follow through on its promises when its production fell from the previous month’s totals. The drop was modest—just 79,000 barrels per day—and it was driven in large part by Libya’s continued struggles to get its output back online, but starting the slide in production is an accomplishment. 79,000 bpd won’t cut it, but on the demand side there’s more working in the favor of a rebalanced market, as OPEC expects oil demand will increase by more than previously expected in 2018.

However OPEC may be like the dog chasing the car, not sure what it would do if it ever caught it: if prices do rise with any real significance as a result of the cartel’s actions, it will be American shale producers, not petrostates, that will be quickest to pounce. Fracking occurs on a smaller scale, and it’s easier to ramp up (or down, as the case may be) as a result of global prices. And U.S. suppliers aren’t just capable of seizing the opportunity for a rebound, they’re chomping at the bit—low oil prices have put a significant dent in the shale boom, and there’s already a backlog (or “fracklog”) of drilled but not yet completed wells just waiting for the economics to change.

The cartel is between a rock and a hard place, and none of its options are going to be anywhere near as comfortable as the era of $100 crude.

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