US Shale Revolution is diminishing OPEC & Russian energy role

The rise of US shale is “diminishing” the influence of OPEC, Russia and their allies, and the coalition would be better off leaving the oil market to its own devices, the IEA’s executive director Fatih Birol said.

“Those
days that oil markets, developments and prices are determined by resolutions,
discussions and so on are over. There are very strong market forces now, mainly
driven by the US shale revolution,” Birol said in reference to OPEC’s market
management strategy.

OPEC,
Russia and nine other non-OPEC partners are in the midst of a 1.2 million b/d
production cut that has helped oil prices recover from a slump in the last three
months of 2018. The cut agreement is scheduled to run through June and is
likely to be adjusted after the US announced it would end all waivers from Iran
oil sanctions when they expire at the start of May.

Saudi
Arabia and the UAE are expected to compensate for the shortfall, but global
output cooperation is seen as more complicated.

While
the 24-country coalition controls almost 50% of the global oil market, the
relentless rise of US crude supply means there will be “more competition
between the resolutions in Vienna and the production in the Permian.”

Birol
predicts the US will make up 70% of the rise in global oil production over the
next five years, suggesting a futility in OPEC’s actions.

“The
voice of Mozart will not be heard in Pennsylvania,” he said, speaking at the
IEA headquarters in Paris. Birol explained that “the economic effect is
stubborn, there is a lot of oil coming onto the market, with the expansion of
the pipelines,” which will increase the ability and speed of US shale to “react
to international price developments big time.”

Birol
added that on top of US shale there is the progress of clean technologies,
especially with the rise of electric vehicles, which adds to OPEC’s challenge
and eats into their global energy mix.

“My
humble suggestion as a former OPEC employee is that it is now the highest time
in the history that they need to diversify their economic base,” he said.

Birol
is less concerned with the impact US shale is having in terms of lightening the
overall global crude slate. US crude is generally much lighter and sweeter than
the majority of OPEC crudes and thus these recent developments have changed the
diet for refiners and types of oil products. Lighter crudes tend to produce
more gasoline and naphtha, which is already in abundance.

“The
complexities of the refineries will be less and less in the future. A reversal
of the trend we have been seeing in the past. So from our point of view we
don’t see a major problem and shale quality is very much in line with the
development with the oil demand,” he explained.

GEOPOLITICAL
RISK PREMIUM

Oil
market volatility has been driven by the rise of geopolitical risks in recent
times and Birol said these risks continue to worsen.

He
highlighted Iran, Libya, Venezuela, Algeria, China-US trade tensions and said
these would influence the market more in the coming quarters than supply and
demand fundamentals.

“I
am an energy man, therefore I don’t like it, I would like to see oil markets
determined by market forces than such developments,” Birol said.

Sanctions
and power outages have crippled Venezuela’s oil industry, Iran faces the full
force of US sanctions on its oil exports and Libya is suffering from political
infighting which could once again wreck production that only recently climbed
above 1 million b/d.

Meanwhile
Iran has threatened to close a key shipping chokepoint, the Strait of Hormuz,
in retaliation against the US.

He
warned of the risk of oil prices heading well above $70/b to the oil market and
the global economy, while also saying that if prices were too low it would hit
investment in the industry and key oil producing countries.