Swings and roundabouts

Author Toby Shelley

IEA executive director Maria van der Hoeven’s presentation of the Medium-Term Oil Market Report (MTOMR) yesterday was almost racy, by the yardstick of IEA events anyway.

IEA executive director Maria van der Hoeven’s presentation of the Medium-Term Oil Market Report (MTOMR) yesterday was almost racy, by the yardstick of IEA events anyway.

The key takeaway was that Opec’s decision — read Saudi Arabia’s decision — to defend market share rather than prices by maintaining the 30mn b/d agreed production level “may have effectively turned LTO [light tight oil] into the new swing producer”. Through what van der Hoeven termed an “unusual supply response to lower prices”, Opec has abnegated responsibility for rebalancing the market, moving Russian state-controlled oil firm Rosneft’s chief executive, Igor Sechin, to accuse the Mideast Gulf Arab cabal within Opec of destabilising the markets and demolishing the “unity of interest within [Opec’s] walls”.

Light tight oil means that non-Opec supply is much more price elastic than before while demand has become less price elastic, the IEA argues. And the logistics of light tight oil production and investment mean that operators can be nimble. Sure, growth will slow significantly when prices are low. Investment cuts in light tight oil will translate quickly into supply cuts. But, by the same token, it will bounce back at speed.

So, Opec is seen winning back some market share of supply, albeit not regaining pre-2008 levels, but only halting rather than reversing a fall in its share of capacity.

A keenly-watched forecast in the monthly IEA and Opec market reports is the “call on Opec crude”, broadly the difference between demand and non-Opec supply. The efficiency of Opec in matching its members’ actual output to the call on its crude is the measure of its effectiveness as a swing producer.

But if the IEA now believes that there is a new kid on the block, an obvious question is will we now scan the monthly report for forecast of the “call on light tight oil”? Not for now. Antoine Halff, the IEA's oil industry and markets division chief, says the historical data do not exist to provide one. The bottom line of the MTOMR presentation may be the conviction that light tight oil can and will swing. But, in conversation, IEA officials concede that they are not quite sure how. As Halff notes, light tight oil production involves a number of moving parts — a multiplicity of operators, hedges that may temper responsiveness to price signals and a variety of sources of capital. There are a lot of unknowns.

Meanwhile, there may be wry smiles in Riyadh reading the latest IEA monthly report, which revises the second-half of 2015 call on Opec crude — and stock changes, it should be said — up to 30.2mn b/d, which is above the agreed production level although still below actual output.

For more information please contact OilBlog@argusmedia.com

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