OPEC And U.S. Shale Drillers Are On Collision Course

via The Global Warming Policy Forum (GWPF)
http://www.thegwpf.com

The oil market is on an unsustainable course with output from U.S. shale and other non-OPEC sources increasing rapidly, while OPEC and its allies trim production to reduce inventories and prop up prices.

The International Energy Agency (IEA) projects non-OPEC output will increase by 1.5 million barrels per day (bpd) in 2018 (“Oil Market Report”, IEA, June 2017).

If that proves correct, non-OPEC suppliers will capture all the increase in demand next year, because the IEA predicts consumption will increase by only 1.4 million bpd.

In effect, OPEC will be restricting its own output only to see rival producers step in to meet growing demand from refiners.

OPEC will face the familiar dilemma of whether to defend oil prices by continuing to restrict output or defend market share by growing production again.

OPEC and its non-OPEC allies are unlikely to remain impassive as U.S. shale producers and other non-OPEC countries not bound by the production agreement capture all the growth in market demand in 2018.

If U.S. shale production continues to grow rapidly, OPEC will probably return to defending its market share in 2018, even if it means accepting lower oil prices.

SWITCHING TACK

OPEC’s strategy can best be described as a cycle alternating between prioritizing price protection and defending market share.

Between 2012 and the middle of 2014, the organization’s members complacently enjoyed high prices but ceded market share to the U.S. shale sector and other non-OPEC producers including deepwater projects.

OPEC’s share of the market shrank progressively from 43.5 percent in 2012 to 41.2 percent in 2014, the lowest since 2006, according to BP (“Statistical Review of World Energy”, BP, 2017).

If the shale boom had continued, with U.S. production growing at more than 1 million bpd per year, OPEC’s share would have fallen even further in 2015 and 2016.

So OPEC, under the leadership of Saudi Arabia, refused to cut production and allowed oil prices to fall to curb the shale boom and deepwater projects, which was the only rational strategy under the circumstances.

Between mid-2014 and mid-2016, OPEC’s strategy switched to protecting its market share and allowing oil prices to sink.

OPEC’s market defense strategy appears to have been successful, with its share of output climbing from 41.2 percent in 2014 to 42.7 percent in 2016.

But the cost proved more painful than anticipated, with oil prices slumping from an average of $100 per barrel in 2014 to less than $45 in 2016.