The 3 factors that are overwhelming OPEC

Coming to Vienna straight from Paris – from COP21 to OPEC – is a bit like crossing Checkpoint Charlie guess from West to East Berlin at the height of the Cold War or, even more extreme, changing shirts from Manchester City to United. The two ideologies are extreme, opposing and prone to some serious clashes a couple of times a season.

And while oil producers have been the unilateral superpower of energy supply and demand for over a century, the question now begs, do we finally have a game-changer?

The problem for Saudi Arabia, long the free-spending global oil superpower, is that everyone is looking to it for some kind of overpowering reaction to current events and it seems clearer to me by the day that the Kingdom and its oil producing allies just don't have the arsenal to control the game anymore.

A worker walks at the Nahr Bin Umar field, Iraq.
Essam Al-Sudani | Reuters
A worker walks at the Nahr Bin Umar field, Iraq.

In times gone by, a physical tweak in output would have huge, exponential effects on global oil prices. In fact, more often than not a verbal change to output policy would do the trick. Let's face it can anyone actually remember the last time OPEC actually produced what it said it was going to do so? No, me neither, and just to reiterate the point OPEC is still producing over a million barrels a day over its stated 30 million barrel taste.

Anyway back to the groupie-like obsession with following every utterance of Saudi oil minister Ali Al-Naimi and his peers within OPEC. The truth is I have never understood how investors can put at stake billions of dollars on the utterances of ministers when they are often cryptic at best, designed to create opacity at worst. The Alan Greenspan school of "keeping them guessing" has been perfected here in Vienna after decades of fine-tuning.

And yet we never learn, we are Pavlov's Dog and for some of us, it's our job to be so. Trying to interpret every morsel of information no matter how bare.

Back to the changing landscape, and I am the first one to question the claims made at COP21 about the end of fossil fuels, the death of carbon and so on ...

And yet it doesn't take a binary shift in consumption patterns, tax and regulation to put in jeopardy billions of dollars' worth of "future" investment in the oil industry. It's not today's supply and demand that is the real problem, despite the daily oversupply of oil at the moment of over a million barrels. It's the future balance that is key on both investment and consumption.

The real problem for OPEC and BP and Exxon and all the others, including the shale upstarts, is the threat of COP21 creating a process whereby stranded assets in hydrocarbons are created, where, oil, coal and to a lesser degree gas, are unborneable and uninvestable. Bank of England governor Mark Carney and others have raised this concern. It's real and terrifying for long term oil investors and producers.

If the International Energy Agency's predictions are correct, cumulative demand for oil could be lower by over 100 billion barrels over the next few decades and, as Barclays points out, this could mean $22 trillion of revenue for producers that will never be realised. $22trillion!

In addition, to the COP threat, let's not forget the other major structural trends going on in oil supply. Shale has been seriously underestimated by OPEC and has not seen production fall off a cliff in response to the halving of crude prices. Yes, production is off its peak but by a fraction of what was expected to be the case at $40 per barrel.

Plus the not small matter of the end of what was labelled the "supercycle" with China and the rest of emerging markets seeing a marked growth slowdown. Put them all together and you have a triumvirate of structural factors overwhelming the producers.

Do we really believe a tweak in Saudi Arabian oil production and a tweak in the language at OPEC Friday is going to overcome these three major structural challenges? OPEC has proven more robust than many detractors had thought possible for decades but against the combination of the COP21 process, shale's stunning arrival and the end of the Supercycle, I for one question the ability to control things in quite the same way of old.

Steve Sedgwick is co-anchor of "Squawk Box Europe" and is also CNBC's OPEC reporter. Follow him on Twitter @steve_sedgwick.

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