Flash Note
July 15, 2015
Alex Fusté
@AlexfusteAlex
[email protected]
The monopoly power of OPEC countries is
now a mirage.
I have been carefully listening and speaking last night with some external
collaborators (specialized in the energy sector) about their assessment of
yesterday’s deal agreed with Iran to lift the economic sanctions against
this country. Although the opinions received were varied, thanks to the
ever valuable reflections of people such as A.Kaletski, one can get an
idea of what could be a feasible scenario for the following years. In this
paper, I summarize some of the key points.
Iran will add as much output
as the US shale revolution
did.
Iran will be able to rump up its crude output from the current 2.8mn
barrels daily, to the 3.6mbd it produced until the latest tightening of
sanctions in 2012, and ultimately to its peak production of 6mbd
attained in the 1970s, when Iran’s oil industry enjoyed the benefits of
Western technology, know-how and finance. More importantly, the
advances in production technology since the 1970s suggest that “Iran
should be quite capable of producing more oil in the long run than it
did 40 years ago” (in Kaletsky’s words).
Is this a feasible scenario? Given that Iran has the fourth largest proven
oil reserves and that this reserves are geographically as easily accessible
as Saudi Arabia’s, restoring (or exceeding) 1970 production levels seems
a very modest long term objective according to some sources.
The price war in the oil
market is bound to intensify.
What could be the potential effects on oil price in the short-term?
Our sources confirm that to make room in the market for all this extra oil,
Iran must compete fiercely not only with the burgeoning production from
Saudi Arabia, Kurdistan (both producers pumping at record rates), Libya,
Nigeria, but also with the Iraqi production capacity (that keeps improving
according to the EIA). The price war among OPEC producers, which is
added to war between OPEC and US shale oil, is bound to intensify as
Iran re-integrates into the global economy. This will keep oil price at a
very moderate levels, hovering around the $50 per barrel.
What is our long-term outlook for the oil price? If Iran reaches its
1970’s production level in the mid to long term, Iran will add about as
much to global oil output in the second half of this decade as the US
This document has been produced by Andbank, mainly for internal distribution and professional investors. This document should not be
considered as investment advice or recommendation to buy any asset, product or strategy. References to any issuer or security, are not
intended as any recommendation to buy or sell such securities.
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Flash Note
July 15, 2015
shale revolution did in the first half. Now you can imagine the impact
this may have on the price of oil.
The oil market has definitely
shifted to the sort of
competitive pricing.
The oil market has definitely shifted from monopoly price setting by
OPEC to the sort of competitive pricing, and in normal competitive
markets the price is set by the marginal cost of production of the highest
cost producers (in this case, these are the US frackers, whose marginal
costs seem to be in the $50-$60 per barrel but are falling rapidly as cost
of drilling also do. If the marginal cost is set in the $50, we could expect
this level to be a ceiling rather than a floor for the price of oil in a
competitive pricing system.
Therefore, in this new and competitive oil market, oil prices will
fluctuate between a ceiling (determined by the break-even point of the
high cost swing producers -US frackers and Canadian tar sands-), and a
floor (determined by the lowest-cost producers in the Middle East OPEC
members, Azerbaijan, Kurdistan, Russia, etc.)
I share the view of some old rockers in the sector, according to which the
oil market is re-entering a competitive pricing period similar to 19862004, where $50 per barrel could perfectly be a ceiling.
The oil price will be set by
the marginal cost of
production of the highest
cost producers
Some still believe that OPEC countries (or Saudi Arabia) can set oil
prices at whatever level they wish (as they did during the “monopoly
periods” of 1974-85 and 2005-14). In a world where oil demand is
constrained by advances in non-fossil fuel technologies, and oil supplies
keep expanding as a result of new production techniques, such monopoly
power is now a mirage.
This document has been produced by Andbank, mainly for internal distribution and professional investors. This document should not be
considered as investment advice or recommendation to buy any asset, product or strategy. References to any issuer or security, are not
intended as any recommendation to buy or sell such securities.
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