What Do OPEC, US Shale Honchos Talk About When They Talk About Oil?

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Whether you think professional conferences are valuable or a waste of time and money, there’s no denying that the CERAWeek energy conference that began Monday in Houston is a big deal. During the week-long event sponsored by IHS Markit, the heads of Saudi Aramco, BP, Royal Dutch Shell, Petrobras and Pemex, the secretary general of OPEC, and oil ministers from several OPEC countries will take the stage to talk about energy.

One of this year’s most interesting events is not on the calendar. Representatives of OPEC and of the U.S. shale oil industry met for dinner Monday night and the discussion focused on what U.S. producers can do to help stabilize global oil markets. As with so many things in the energy business, the guest list was deemed to be “proprietary” information and not revealed to the public.

OPEC ministers are worried about the effect that new production from U.S. shale plays will have on crude oil prices. Mark Papa, former CEO of EOG Resources Inc. (NYSE: EOG) and one of the early shale producers, told Bloomberg, “I don’t think this [meeting] will result in anything but platitudes.” That would seem to be a safe bet.

OPEC has gotten the message that rising U.S. production threatens to offset falling production — whether by design or natural decline — and undo the positive effect the cartel’s production cuts have had on global stockpiles. In short, OPEC wants U.S. producers to become associate members of the cartel and limit production in order to maintain higher prices for producers.

Of course OPEC Secretary General Mohammed Barkindo denies that: “We are not talking about prices. We are not talking about production cuts. This is not the objective of the dialogue.” Right.

Barkindo also said that OPEC ministers would be meeting with hedge fund and other money managers as well as physical traders of oil. Hedge funds had been paring down their record levels of long contracts, reducing their bets that petroleum prices would continue to rise. Last week, however, the managed money crowd reverted to their old ways and added a total of 68 million barrels to their long positions in six futures and options contracts.

Fund managers remain long on oil by a ratio of 11 to one. While this helps prop up prices, the downside risk from such lopsided book could play havoc with prices when fund managers decide to take profits.

The point here is that U.S. producers, on course to become the world’s top supplier over the next five years, are not likely to “join” OPEC and fund managers are not likely to do anything that will jeopardize their profits. If OPEC is seeking something as basic as support from U.S. producers for an extension beyond the end of this year for the cartel’s production cuts, the cartel is likely to be disappointed. And if they expect traders to do anything but listen politely and then continue to do what they’ve always done, the cartel will be doubly disappointed.