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Crack in the Dike at OPEC

January 18, 2023

No less an authority than Daniel Yergen has weighed in on the attempt by western democracies to force upon the Russians a bifurcated crude oil market.  He did it via an Op-Ed piece in the Wall Street Journal published on December 26, 2022 (https://www.wsj.com/articles/putin-cant-count-on-the-global-oil-market-price-cap-revenue-production-cut-friedman-biden-eu-russia-energy-11672065849?reflink=desktopwebshare_permalink).  It appears that the west has initially gained modest success in forcing the Russians to endure prices that are running roughly $15-$20 per barrel less than Brent Crude.  This is not a massive discount, but it is an involuntary arrangement which is unprecedented price control.  De facto it undermines OPEC’s power.  Recently published statistics indicate the Russians have had to cut back production by roughly 2MM BOPD.  This shift – thought to be dubious – is, at least initially, working.

What Yergen did not go into is the direction of the overall crude oil market in the next two or three years.  That’s the more interesting issue because the fundamental signs are that new supplies are not being brought on fast enough to keep up with demand.  That’s due in large part to lackluster CapEx plans across the U.S.-based shale producers; although Exxon is upgrading as it reports plans to increase output by 20% in the next few years.  (Chevron has a similar story, too.)  Demand, however, is The Wild Card because China’s abrupt reversal on Covid lockdowns is creating economic turmoil.  The overriding issue for the near term is the degree to which the Chinese economy will slow down.  And, no one can make a reliable prediction about that factor at this time.  Offsetting possible softness from China is the struggle that the U.S. Government will face as it attempts to replenish the 180,000,000 barrels of crude that were utilized last year from the Strategic Petroleum Reserve.  Oil prices could be soft or they could soar!  We’ll be monitoring these critical moving parts and keeping you informed as this new year plays out.

In the meantime, we at First Keystone lodged in Pecos (Texas) continue to support the strengthening of the U.S.-based supplies of crude by offering state-of-the-art industrial buildings for lease.

The opinions expressed above reflect only those of the author and do not represent those of the First Keystone Pecos Industrial Park organization.  First Keystone welcomes responsible fact-based discourses on these topics.

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