Last week\u2019s Viennese waltz may have featured a little flirting between Opec members, but no firm proposals.<\/p>\n
There was no output cut, nor even a raising of the group\u2019s production ceiling to acknowledge reality.<\/p>\n
This is no surprise. What was notable were signs of adjustment to a new reality \u2013 that, after almost a year\u2019s reflection, the initial shock of the falling oil price has worn off. At the Opec seminar, oil ministers from Iraq and Venezuela suggested between US$75 and $80 a barrel as a fair price.<\/p>\n
The fiscally more secure members \u2013 Saudi Arabia, Kuwait, the UAE and Qatar \u2013 all expressed satisfaction that an improving market showed their strategy was working.<\/p>\n
Hints that\u00a0Opec<\/a>\u2019s notional 30 million barrel per day ceiling might be raised to narrow the gap with actual production of 31.58 million barrels a day last month were clearly too early. It would be hard to set a cap while Iran\u2019s return is imminent. And the ceiling is close to meaningless \u2013 Saudi Arabia will not swing its production to balance the group, and Iraqi output continues to reach record highs. Nobody can be accused of \u201ccheating\u201d when the members do not have individually assigned quotas.<\/p>\n The truth is that Opec, in its traditional though misleading guise as a market micro-manager, is structurally incapable of meeting the challenge of shale. The divergence in its members\u2019 interests is too wide \u2013 some are fiscally secure and able to fight a price war (the GCC), some rely on major production gains to bridge financial gaps (Iraq and Iran), some are financially vulnerable and unable to raise output (Venezuela, Nigeria and Algeria) and one is in chaos (Libya).<\/p>\n Instead, Saudi Arabia and its Arabian Gulf allies have decided not to offer the weaker members a short-term panacea, but instead to impose on them what is in their own long-term interests.<\/p>\n Some analysts now hold that US shale has replaced Saudi Arabia as the world\u2019s swing producer, able to adjust production quickly in response to market needs. This confuses a swing producer with the marginal producer \u2013 the highest-cost source of\u00a0oil<\/a>\u00a0that has no choice but to stop production when prices fall.<\/p>\n The marginal producer\u2019s role is nothing new \u2013 historically played by the high-cost North Sea or mature US fields. The difference today is that shale, whose well productivity declines sharply from initially high levels, could respond much faster to price changes \u2013 whether down or up \u2013 than the behemoth projects of yesteryear.<\/p>\n That is the theory. It has yet to be proved in practice. But supporting evidence includes the 52 per cent drop in active US drilling rigs since last year\u2019s price fall, the signs of stabilisation after prices recovered modestly and the backlog at 4,731 wells (as of February), drilled but waiting for higher prices to be fracked and brought into production.<\/p>\n Observations of rising efficiency, falling costs and the option of cheaply refracking existing wells suggest that shale may be not only quicker to respond to market signals, but more robust at lower prices than earlier thought.<\/p>\n Although this confrontation is being cast as a battle of Opec \u2013 Saudi Arabia in particular \u2013 against shale, the oil producers to suffer are more the ageing fields in the North Sea, along with capital-intensive, long-term projects in deep water and Canada\u2019s oil sands, which cannot easily be stopped and restarted. That presents the operators of such resources with a dilemma \u2013 even if they can theoretically produce at a lower cost than shale companies, the risk of a long-term price slump makes it hard for them to sign on for new investments.<\/p>\n Saudi Arabia\u2019s strategy is working, although too slowly for some of its partners. Yet shale, only a debutante in 2012 and even not present last week, was again the belle of the ball in Vienna.<\/p>\n