Big oil is back

Saudi Arabia and its allies have indicated they want to prolong their output cuts to reduce OECD commercial crude and products inventories nearer to their five-year average. Saudi Arabia’s oil minister has said the rebalancing process is still unfinished and he wants a further decline in stocks. But the kingdom is also anxious to avert a spike in prices that would encourage a resumption of the shale drilling frenzy in late 2016/17. For their part, shale company executives have promised they will be more disciplined in the future and will prioritize increasing profits over production. Beneath the cautious rhetoric, most companies are targeting increases in both profitability and production in 2018. For all the talk about restraint, the U.S. shale sector is already adding more drilling rigs in response to the rise in prices.

In the oil market, as in most other circumstances, what matters is what people do, not what they say. Talk about restraint is contradicted by actions that point to growth. If OPEC continues its output restraint and reduces stocks, crude prices are likely to rise further in 2018, which will spur more drilling. Given the strong growth in oil consumption, there is room for both shale producers and OPEC to increase production in 2018. But OPEC must be careful not to tighten the market too much or it risks slowing demand growth and revitalizing shale, putting the organization’s rebalancing strategy back to square one.

Yet, that is assuming that demand slows down. Demand has been the equalizing factor in most oil rallies. Back in the 1999 to 2008 oil rally there was a lot of skepticism that oil price could rise in the early years above $30 barrel. The reason was twofold. One was technology. Use of computers and new mapping techniques could find new sources of oil and distribution of oil supply would be more efficient. They argued that we had a supply glut. They argued that if oil went above $30 a barrel the demand would slow causing a drop-in price. Yet what they underestimated then as they are today and that is the impact that low oil prices have on demand growth. They tried to downplay China oil demand growth for years until it was so apparent in a few years that it could not be downplayed. It is very important that producers and users of oil and even traders don’t make the same mistake.

Oil traders will also be watching Brazil for the possibility of a strike. Bloomberg news reported that workers represented by oil labor union de Janeiro approved a strike starting on Wednesday, according to Sandpiper’s website.  Workers are against Petrobras’s asset sales and the wage readjustment proposed by the company on Nov. 10. Yet these strikes in Brazil normally don’t last long even if it happens at all.

Dow Jones reports that Venezuela President Maduro's says his decision to move an active military person, National Guard Maj. Gen. Manuel Quevedo, into the dual post of energy minister and head of state oil company PDVSA is aimed at stomping out oil-sector corruption. But Teneo Intelligence says the move, which continues a purge of management within PDVSA and Houston-based refining and distribution subsidiary Citgo.

Bloomberg News reported that Royal Dutch Shell Plc will pay its entire dividend in cash for the first time in more than two years as Europe’s biggest oil company seeks to demonstrate it has left the worst of the crude slump behind. Shell will stop the so-called scrip dividend, which gives part of the payout in shares, from this quarter, it said Tuesday. It also reiterated a 2015 plan to buy back at least $25 billion of shares by 2020, subject to further debt reductions and a continued recovery in oil prices.

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