From the February 2014 issue of Futures Magazine • Subscribe!

The New World of energy

OPEC losing clout 

The chance of a significant spike in global production is a concern for OPEC. 

“They are sending a message to Iran and Iraq that you can’t just dump oil on the market,” Flynn says. “It is going to cause more friction in the cartel, which has been seeing more friction over the years — and we are not even talking about increased U.S. production. OPEC definitely has some challenges.”

Protec Energy Principal Todd Garner says that Saudi Arabia and other OPEC members have grown accustomed to $100 crude. “Brent crude has to be over $100 to completely fund those countries the way they fund them. The only way to keep Brent high is for the Saudis to cut back production,” Garner says. “If we did this deal with Iran, and Iran started ramping up production, now you have a battle between all of these Middle East producing countries where OPEC falls apart.”

Of course, OPEC will take action. “I don’t think OPEC is going to sit and let the price of oil go down significantly, they will cut production strongly,” Chirichella says. “We saw what they did in 2009 when they cut production by 4.5 million barrels a day. OPEC certainly will defend the price of oil if we see Brent drop below $100 (WTI below $90); we will see OPEC getting very aggressive.”

But with increased North American production, the Saudis may not have the leverage they once did. “Ten years ago they could control the market because the [United States] was a huge importer; that is not the case anymore,” Garner says. 

Flynn adds, “The increased U.S. production could take some options away from Saudi Arabia and OPEC as production cuts could lead to a loss of market share.”

Chirichella, however, believes the Saudis still can dictate price to some extent. “Unless the law is changed, we can’t export crude oil,” he says. “The [United States] is producing the maximum amount of oil it can produce right now. It is going to grow, but at a slower pace. OPEC easily can cut a couple of million barrels a day out of production and it will have a strong impact on prices.” 

Chirichella is referring to the ban on exporting U.S. crude oil, which has been in effect since 1975. It is a topic of discussion because U.S.-produced light sweet crude is trading at a discount within the United States because the refineries have become used to the heavier grades. 

“Refineries have grown accustomed to refining sour crude oil and are now flooded with U.S. sweet, which is trading at a $10 discount within the [United States] vs. international markets, says Hai Chen, managing director of Principle Capital Management.

Senator Lisa Murkowski (R. Alaska), ranking Republican on the Senate Energy and Natural Resources Committee, has called for repeal of the ban.

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