OPEC is finished: Oppenheimer’s Fadel Gheit

OPEC is a dysfunctional organization that has outlived its usefulness, Oppenheimer senior energy analyst Fadel Gheit said Thursday.

“OPEC is finished. OPEC is over,” he said in an interview with CNBC’s “ Power Lunch .”

“Shale production has completely changed the way we look at energy and it’s not going to change. The fact of the matter is that OPEC and Saudi Arabia are no longer the swing producers they were only two years ago.”

In its meeting Thursday in Vienna , the Organization of the Petroleum Exporting Countries failed to agree on a new production ceiling and therefore did not change its oil output policy. The cartel has been pumping oil at record levels despite the drop in global crude prices that began in 2014.

While prices have rallied in recent months, they remain well below the $100 level crude had enjoyed before the rout.

Now, “the market will dictate where oil prices will be,” said Gheit. He thinks the “new normal” for crude will be $60-$65 per barrel. He predicts that will happen in the next six to 12 months.

Those who think it will get to $80, $90 or $100 are barrel are “delusional,” he added.

Gheit believes U.S. exploration and production companies will be the best-performing stocks going forward. That’s because when oil prices crashed, they got creative in cutting costs and improving operating efficiency. Therefore, the break-even point for those companies has gone down.

“Higher oil prices will create [a] profitable environment at $60-$65 oil,” he said. “Only two years ago, you needed $80, $85 to $90 oil.”

See how Militants are controlling OPEC’s oil production

Militants patrolling the creeks of the Niger Delta area of Nigeria in 2006.

Oil watchers have been waiting for a production cut for almost two years.

But while OPEC hasn’t yet participated in a coordinated effort, the cartel of oil-producing countries technically has slashed its output.

Or, more accurately, Nigeria, one of its 13 members, has.

“Actually, we did have a de facto OPEC cut. Just — it was by accident,” Helima Croft, the head of commodity strategy at RBC Capital Markets, told Business Insider in an interview on Tuesday.

“Nigeria is that big supply-disruption story — and it can just go on,” she said.

Nigerian oil production has fallen by 31% this year to about 1.4 million barrels a day, down from 2.03 million barrels a day in January. That’s such a huge drop that Angola is now the No. 1 producer in Africa, as its production held steady in April at 1.8 million barrels a day.

Attacks on energy infrastructure by a new militant group called the Niger Delta Avengers have been the main cause of the production outages. Most notably, the group attacked a Chevron offshore facility earlier this month and the underwater Forcados export pipeline operated by Shell in late March.

Croft has since argued that even if Canada comes back from its devastating wildfires, Nigeria has essentially caused a rebalancing in the oil market all by itself.

The Niger Delta Avengers’ rise has roots dating back to the 2000s, when armed militants in Nigeria’s oil-rich Niger Delta, including members of the Movement for the Emancipation of the Niger Delta, routinely kept hundreds of thousands of barrels of oil off the market.

At its peak, MEND slashed Nigeria’s output by half and cost the government $19 million in daily defense outlays, according to previously cited data by the RBC Capital Markets team.

In an effort to curtail the chaos and huge financial losses, the Nigerian government in 2009 signed an amnesty agreement and pledged to provide monthly cash payments and vocational training programs to the nearly 30,000 former militants in exchange for cooperation. Some of the more influential members like the ex-leader Government Ekpemupolo (referred to as Tompolo) also received lucrative security contracts worth nearly $100 million a year.

The arrangement was a pretty good Band-Aid. But it failed to address the fundamental drivers of instability in the region such as poverty, corruption, and the proliferation of weapons.

Fast forward to today: The Buhari administration has cracked down on corruption in the region by axing the expensive security contracts and issuing indictments for theft, fraud, and money laundering.

Even if the government wanted to pay off the militants today, it doesn’t exactly have the money for it, with oil prices still far below their peak and state resources redirected to counterinsurgency operations against Boko Haram.

“When people say the government can just pay them off — with what money?” Croft told Business Insider. “What president is running Nigeria right now? Now, if President Buhari folds to the militants, his whole reason for being in office then evaporates. He ran on a program of fixing Nigeria and ending the cycle of payoffs.”

Given that the Nigerian disruptions are at least partially a product of long-run structural issues, one can argue that they could last for some time. (As opposed to, say, the Canadian wildfires, which, while devastating, are only a temporary headwind.)

“I think we have to look at what happened in the past and say, well, could they potentially shut in production? … No company is going to keep their operations going when people show up with AK-47s,” Croft said. “You just wait it out. You don’t run a risk to your personnel or operations.”

“These are structural problems in these oil-producing states,” she continued. “This not noise. This is not something that you can take your magic wand and make this thing go away.

“So this one, I think, fasten your seat belts. This one’s going to go on.”

Oil expected to drop after meeting in Qatar collapses

DOHA, Qatar (AP) — A meeting of oil-rich countries in Qatar that had been expected to boost crude prices by freezing production fell apart Sunday as Iran stayed home and vowed to increase its output despite threats by Saudi Arabia.

Oil prices, which hit a 12-year low in January by dipping under $30 a barrel, had risen above $40 in recent days, buoyed by the bullish talks surrounding the Doha summit.

But instead of a quick approval of a production freeze, the meeting of 18 oil-producing nations saw hours of debate and resembled the dysfunction of an unsuccessful meeting of the Organization of the Petroleum Exporting Countries in December that sent oil prices tumbling.

The fact that producers couldn’t agree to a freeze, let alone a production cut, likely means oil prices will drop again as markets open Monday.

“Prices will trade lower. Maybe sharply lower,” said Robert Yawger, director of energy futures at Mizuho Securities USA, noting the failure to reach agreement in Doha.

He noted that other factors were negatively impacting prices: U.S. crude oil storage remaining at all -time highs, Iran increasing production, and Libya looming on the horizon to boost output.

Speaking to journalists after the summit, Mohammed bin Saleh al-Sada, Qatar’s energy and industry minister, tried to say the lack of a decision showed officials believed “the fundamentals of the market are generally improving.”

However, he largely dodged the questions about whether another special summit will be called before OPEC’s next meeting in June and whether Iran had anything to do with the breakdown of the talks.

“We of course respect their position and … we still don’t know how the future will unroll but it was a sovereign decision by Iran,” said al-Sada, who is serving as OPEC’s president. “The freeze could be more effective definitely if major producers, be it from OPEC members like Iran and others, as well as non-OPEC members, are included in the freeze.”

Sunday’s gathering grew out a surprise Doha meeting in February between Qatar, Russia, Saudi Arabia and Venezuela, in which they pledged to cap their crude output at January levels if other producers did the same.

The idea of a freeze and not a cut initially looked more palatable to producers already suffering after oil’s dramatic fall since the summer of 2014, when prices were above $100 a barrel.

Production continues to rise as countries try to make up the difference. Ahead of Sunday’s meeting, Iraq boosted its production to record territory of over 4 million barrels a day in March, and Kuwait pumped 3 million barrels a day with homes of reaching 4 million a day by 2020.

And while car owners and airlines have enjoyed the low oil prices, the plunging oil revenues have wreaked havoc on countries like Nigeria and Venezuela, both of which attended Sunday’s meeting along with non-OPEC member Russia.

The biggest wild card of the talks, however, wasn’t even in the room. Iran decided to stay home late Saturday after saying the day before it would send an emissary to the meeting. Speaking to Iranian state television, Oil Minister Bijan Namdar Zangeneh said it didn’t make sense to send any representative from the Islamic Republic “as we are not part of the decision to freeze output.”

“We can’t cooperate with them to freeze our own output, and in other words impose sanctions on ourselves,” Zangeneh said.

With many international sanctions lifted under its nuclear deal with the U.S. and other world powers, Iran began exporting oil into the European market again and is eager to claw back market share. It produces 3.2 million barrels of oil a day now, with hopes of increasing to 4 million by April 2017.

Sunni-ruled Saudi Arabia had said it wouldn’t back any freeze if Iran, its Shiite rival, didn’t agree to it, throwing the deal into question before the meeting. The kingdom seems determined to ride out the low prices that could squeeze Tehran.

The enmity between Saudi Arabia and Iran has spiked in recent months.

In January, Saudi Arabia executed a prominent Shiite cleric, a move that sparked protests in Iran that saw demonstrators attack two of the kingdom’s diplomatic posts there. That broke the conflict between the two countries into the open, amid them backing opposing sides in both Syria’s civil war and the war in Yemen.

Saudi Oil Minister Ali al-Naimi repeatedly declined to speak to journalists during the meeting.

The dispute underscores the level of discord inside OPEC as it faces arguably its biggest challenge since the oil glut of the 1980s. Though more-costly U.S. shale oil production has dropped, it could re-enter the market if oil prices rise. And a large amount of crude already building up provides a major damper on prices, as does a generally weakened global economy, according to the U.S. Energy Information Administration.

The immediate effect of the summit’s collapse likely will be seen in crude prices. Western markets were closed Sunday and not immediately affected. Stock exchanges in Saudi Arabia and Dubai closed in negative territory Sunday, with the Saudi Tadawul down 1.48 percent.

Global oil producers meeting disrupted by absence of U.S. and Iran

DOHA, Qatar – Oil-producing countries met Sunday in Qatar to discuss a possible freeze of production to counter low global prices, but Iran’s last-minute decision to stay home could dilute the impact of any agreement.

The attendees, including Saudi Oil Minister Ali al-Naimi, silently swept past gathered journalists at a luxury hotel in Doha ahead of the meeting. Also on hand was Russia, another of the world’s top oil producers. The U.S., now a major producer because of shale oil, did not attend.

At least 15 oil-producing nations representing about 73 percent of world output were expected at the Doha meeting, Qatar’s energy and industry minister, Mohammed bin Saleh al-Sada, has said.

The gathering follows a surprise Doha meeting in February between Qatar, Russia, Saudi Arabia and Venezuela, in which they pledged to cap their crude output at January levels if other producers do the same.

They hope the cap will help global oil prices rebound from their dramatic fall since the summer of 2014, when prices were above $100 a barrel, though no one is talking seriously about the more dramatic step of cutting production.

Prices dropped briefly under $30 a barrel, a 12-year low, in January, but have climbed to the mid-$40s this week, boosted in part by market speculation about the Qatar meeting. Western markets were closed Sunday and not immediately affected by the discussions.

Iran decided to stay home late Saturday after saying the day before it would send an emissary to the meeting.

“We reached the conclusion that the Doha meeting is for those who want to sign the oil freeze plans, and if we wanted to have a representative at the meeting, it was to show our support of this project,” Oil Minister Bijan Namdar Zangeneh said, according to a report by the ministry’s SHANA news agency.

“But since Iran is not going to sign this, there is no need for the presence of Iran’s representative at the meeting.”

With many international sanctions lifted under its nuclear deal with world powers, Iran began exporting oil into the European market again and is eager to claw back a market share. It produces 3.2 million barrels of oil a day now, with hopes of increasing to 4 million by April 2017. On Friday, the Iranian Oil Ministry reiterated it would not join a freeze “before it brings its oil exports to the pre-sanctions levels.”

Sunni-ruled Saudi Arabia has said it won’t back any freeze if Iran, its Shiite rival, doesn’t agree to it, throwing into question whether any deal will be reached. The kingdom seems determined to ride out the low prices that could squeeze Tehran.

That dispute underscores the level of discord inside OPEC as it faces arguably its biggest challenge since the oil glut of the 1980s. Even if officials reach a deal, Iran’s production and oil from other sources, like the U.S., could keep prices down.

The meeting broke up just before 11 a.m. as attendees planned to meet with Qatar’s emir, Sheikh Tamim bin Hamad Al Thani, said Kabalan Abisaab, Ecuador’s ambassador to Qatar, who was on hand for the meeting. Abisaab said participants would return to the meeting in the afternoon and continue their deliberations.

Asked if Iran’s absence had an effect, he responded in Spanish that it “didn’t matter.”

“Believe me, everything is going well,” he said.

Oil prices back to square one

NEW YORK, April 1 (UPI) — Oil prices took one of their biggest hits of the year Friday as pressure from Riyadh’s response to a production freeze was doubled by weak U.S. labor figures.

Mohammed bin Salman, the deputy crown prince of Saudi Arabia, poured water on a fire set by talks of a production freeze from Russia and members of the Organization of Petroleum Exporting Countries in an interview with Bloomberg News.

“If all countries agree to freeze production, we’re ready,” he said. “If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.”

Saudi Oil Minister Ali al-Naimi in December suggested there would be no limit to the kingdom’s oil production.

A meeting planned later this month in Doha is aimed at controlling production levels in an effort to stabilize an oil market skewed heavily toward the supply side. Iran, which is returning to the oil market after years of isolation triggered by economic sanctions, said it would freeze its production, but only after it regained a stronger market position.

When rumors of a production freeze first surfaced in January, Neil Atkinson, the head of the oil markets division at the International Energy Agency, told UPI the market in 2016 would favor the supply side unless there was widespread agreement on controlling production.

Crude oil prices nearly erased all of their gains for the year following the comments from the Saudi official. Brent crude oil was down nearly 4 percent at the start of trading in New York to $38.75 per barrel. West Texas Intermediate, the U.S. benchmark price for crude oil, lost 3.6 percent from Thursday’s close to $36.94 per barrel early in the trading day.

Negative pressure on crude oil prices was influenced further by a slight increase in the U.S. unemployment rate to 5 percent in March. The U.S. Bureau of Labor Statistics reported retail, construction and healthcare jobs increased, though job losses occurred in manufacturing and mining.

The labor sector has been one of the stronger points for the U.S. economy. The latest data show, however, that those left out of the work force for 27 weeks or more were still unable to find jobs, with figures showing little movement since June. Wages, meanwhile, remained relatively flat, growing only 2.3 percent over the year.

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