Are We At Peak OPEC - And Does It Matter?

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Includes: OIL, USO
by: Gary Bourgeault

Summary

The idea OPEC is at peak production is laughable.

Even if OPEC were to be at peak supply levels, it wouldn't matter for oil prices.

Without Iran current supply levels would still exceed demand.

Now that it has been established the price of oil is going to remain subdued for longer than believed, there is always the temptation by financial writers and analysts to find something that will contradict that reality in order to generate some attention.

One of the latest assertions meets that criteria, as one writer suggests OPEC is at peak production, adding the silly caveat - with the exception of Iran boosting supply. That's like saying the price of oil won't find support if Russia doesn't shut down oil production. It's meaningless.

Since these types of reports can gain traction among some investors, I am going to correct this misconception in order to keep traders from forming a view OPEC is at the end of its production growth.

The implication is if OPEC were to be at peak production, it's only a matter of time before it will result in the support of oil prices.

Even if Iran wasn't going to boost production in 2016, OPEC and the rest of the industry would still exceed demand. And if supply and demand were to rebalance on the oil field, it would still take months to work through stored inventory.

Next time you hear about peak oil anything, including peak OPEC, remember when Jimmy Carter made similar predictions back in the 1970s, saying the world would run out of oil by 2012.

Here's how the New York Times opened its article at the time on the "serious" way the Carter administration was dealing with energy problem which was considered a serious threat to world.

"The Carter Administration is serious in a way that its predecessors were not about coping with an energy problem that is real, growing, and a grave threat to modern civilization."

Got it? We were supposed to be doomed by 2012. I know, I know. This time it's really different. That may make good political theatre, but it's a disaster if investors were to believe these types of reports.

source: Steven Goddard via New York Times

Iran's increase in production and supply

I could stop the article here and win the argument. What's the point of saying OPEC has peaked with the exception of one of its biggest producers? What does that even mean? Get it?

The idea that OPEC has peaked if it was to take away Iranian supply doesn't make any sense. OPEC isn't OPEC without Iran at this time; it's one of the member states. Even if it weren't, it would still be bringing more supply to the market, which would have an impact on the price of oil.

Iran has a goal of adding 500,000 barrels a day to global oil supply as quickly as it can. Its long-term goal is to increase supply to about 1 million barrels per day. I don't believe it's just saying those things, it really is going to bring it about. It has no problem with available oil, it's only a matter of when it'll happen, based upon how long it takes to put the plan into action.

This doesn't include other OPEC members which should add more oil to the mix. Among those are Libya, which has been hampered by internal unrest and disruption. In 2011 it was producing about 1.6 million barrels per day. It's under 25 percent of that at this time. That means once the country resolves some of its political problems, it could add more than 1 million barrels to the daily global supply. That doesn't sound like peak OPEC to me.

To further underscore my conclusion, Iraq has stated it is going to boost output in 2016 by up to 400,000 barrels per day, bringing the daily total to over 4 million barrels.

Oversupply still significant

The amount of surplus oil is so high, even if Iran weren't to increase supply, the market would still be able to meet demand for a long time. Not only that, it would continue to supply more than is needed by a wide margin; at least under the current supply/demand environment.

Again, this doesn't include the oil that is in storage around the world, which even if supply were to decrease, would take a long time to work down under the most favorable conditions.

Adding another 2 million barrels a day over the next couple of years, when just taking into account Libya and Iran, underscores the rebalancing challenges the industry faces. It also doesn't take into account the fact of about 350 billion barrels of shale oil waiting on the sidelines. I include that number because the U.S. is already producing its recoverable shale oil, which is estimated to be in a range of 70 to 80 billion barrels. Altogether, global recoverable shale oil is about 419 billion barrels. That number will climb with more exploration. Some of that recoverable shale oil is located in OPEC countries.

Saudi Arabia has said it would take a cut of about 1.5 million barrels a day to rebalance the market and support the price of oil. This is why I say it wouldn't matter if Iran increased supply or not this year. It also confirms how much more it would take to support the price of oil with a lot more coming to market in the next couple of years.

Timing is a factor

There are a couple of elements that need to be discussed concerning Libya and Iran, which will relate to the timing of all of this. The question isn't the amount of recoverable oil, it's bringing it into production that is the issue at hand.

In the case of Libya it's geopolitical issues, and with Iran, it's how long it'll take for it to reach its desired production levels. If it wanted to Iran could raise production even more, but it seems its goal is to reach the 1 million barrel per day amount. In the near term I don't see a problem with it reaching 500,000 per day fairly quickly; meaning possibly as early as 6 months. The 1 million barrel per day will probably take till the end of the year or early 2017.

When one asserts we're at peak anything, it has to include the long-term outlook. In the case of OPEC, that simply is wrong analysis based upon partial information. If there is a peak OPEC, it means it has reached peak oil in the member countries. That may be the case with some of the less important players, but it definitely isn't the case with the larger producers.

Conclusion

Investors need to be more careful concerning reports and news from financial media concerning oil prices and support. As mentioned in the beginning of the article, the press is getting antsy because it's hard to find new angles to report the important oil price story. Consequently, anything a little different is being reported as important, while having no material influence on the industry. Peak OPEC is one of them.

I've only touched a little on this, sharing enough information on OPEC specifically, and the global oil industry in general, to show this is of no consequence to investors, and not reflective of the reality. I haven't even touched on future projects which promise even more oil deposits in OPEC countries. Those weren't included because there is enough easily confirmed information to conclude the idea of peak OPEC is silly at best.

Be cautious when dissecting oil stories. I've seen numerous reports on OPEC's decline, Russia's decline, and shale oil decline. All of these seem to be perpetuated in order to produce some type of support for oil prices. Yet the numbers speak for themselves. Supply is far exceeding demand, and with Saudi Arabia saying it would take a cut of about 1.5 million barrels per day to rebalance the market, I think that's close to being very accurate. That doesn't take into account the oil stored around the world.

For better or worse, OPEC is alive and well and a long way from peaking.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.