OPEC’s Giant Nothing Burger
Welcome to The Real Estate Espresso Podcast. Your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce, and on today’s show, we’re discussing happenings in the realm of energy. Although this is primarily a real estate podcast, it’s essential to discuss energy because energy is the economy. For every unit of economic output, an equivalent unit of energy is consumed somewhere in the globe. There’s a clear correlation between these two which follow each other with precise accuracy.
The first point that needs stressing: U.S. energy dominance and low oil prices cannot coexist, they are mutually exclusive. The cost of shale oil production massively exceeds that of conventional oil, and capital markets today are much smarter than they were at the commencement of the shale oil revolution in 2009. Firms won’t scramble to mobilize hundreds of oil rigs just because oil prices have increased by a few dollars.
I monitor a handful of oil analysts who genuinely understand energy markets. Generally, mainstream media has a simplistic, often incorrect or misconstrued view of the energy world. Recently, media outlets have been tracking and reporting on the US President’s visit to Saudi Arabia. Leaders from the Gulf States, including Qatar, Kuwait, and the United Arab Emirates, were present at the summit. However, surprisingly, there was barely any discussion on oil prices at the summit, which begs the question: why?
Only a week earlier, OPEC had announced new increased production targets. The Saudis deliberately chose not to instigate a public spectacle regarding oil prices, hence their preemptive announcements. However, before we delve deeper, it’s important to understand the distribution of OPEC and its member nations. OPEC is an acronym for the Organization of Petroleum Exporting Countries, initially consisting of 12 founding members.
In 2016, the organization expanded and accepted ten more countries, including Russia, Nigeria, Kazakhstan, among others, forming OPEC Plus. If OPEC intends to maintain its functionality as a cartel, international markets need to trust that OPEC communicates with a single voice and the member nations adhere to the established quotas. Unfortunately, there’s a prevalent belief that numerous member nations have been dishonest or are deviating significantly from the agreed numbers.
Back in 2022, following the supply chain shocks and oil price increases, OPEC member nations saw global inventories rise. They convened and agreed to cut production to prevent excessive inventories and an inevitable crash in oil prices. At the follow-up meeting six months later, despite continuing inventory growth, the OPEC Plus members couldn’t reach a consensus on the production levels. Therefore, a subset made up of eight member nations volunteered to execute a series of production cuts.
For today’s discussion, we’ll label this as the Group of Eight. This group, consisting of Saudi Arabia, Oman, Kuwait, and other Gulf states, cut their production by 1.6 million barrels of oil a day, a figure that was later increased to a voluntary cut of 2.2 million barrels per day. This cut came with the condition that they could reverse these production cuts as soon as they were able. A few weeks ago, this same group revealed that they were almost entirely lifting the production cuts, or at least 900,000 barrels a day of them.
Many oil analysts in mainstream media drew incorrect conclusions about these unexpected production increases. These increases pleased the Trump administration, who would prefer lower oil prices in the U.S. However, logically, if oil prices decrease in the U.S., so should the inflation index, as well as prices for products that depend on energy as an input for their manufacture or distribution. However, OPEC member nations have gained a notorious reputation for extensive cheating. If global energy markets can no longer trust the member nations to comply, OPEC’s usefulness and relevance as a cartel will diminish.
The fact remains that 2.2 million barrels of oil a day is a sizeable production quantity. If we are actually witnessing an increase of more than 2 million barrels a day, then we should see this reflected in rising inventory somewhere in the world. However, the reality is that no increase in inventories is visible.
Throughout 2024, OPEC members failed to reach a consensus on when to reverse the production cuts. As such, they started having monthly meetings instead of biannual ones. During the October 2024 meeting, OPEC Plus members agreed it was time to increase production. However, they decided to defer the production increment until the December meeting due to the pending U.S. elections. In December, they laid out a plan for rolling back the production cuts from April 1st of the following year.
All of this had been planned and announced months prior, but in April, despite quota increases, actual exports from OPEC countries declined. Then, OPEC surprised the market with an announcement of 900,000 barrels a day of new production entering the market. Consequently, there’s a lot of speculation that OPEC is trying to destroy the US shale industry. My initial report was in alignment with this theory, but upon further reflection, the real explanation seems more benign, focused on restoring OPEC’s integrity.
The production increase announcement was perfectly timed with a seasonal surge in domestic consumption. The net result was a decrease in exports, despite production augmentation. The most significant factor, though, is that the increase is not a real increase. It’s an increase on paper. Frequently, OPEC member nations have been accused of cheating on their quotas and tarnishing the organization’s integrity. The consensus is that production amplification in Saudi, Oman, Kuwait, and the UAE is being offset by other countries, including Russia and Kazakhstan, which have been cheating.
In essence, the OPEC-Plus internally agreed that no new oil should be added to inventories. We now have to wait and see whether these countries will comply. Therefore, despite global headline-making announcements, this is actually a giant “nothing burger.” The media is increasingly becoming aware that announcements are often designed to distract attention from other issues the originators would rather they ignore. As you ponder on this, have an amazing rest of your day and go make some incredible things happen. We’ll reconvene tomorrow.
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