OPEC restricts output. North American shale moves back in. The battle continues…
The Organisation of Petroleum Exporting Countries (OPEC) is, of course, operating in a very challenging time. OPEC is facing serious competition in the global market share for oil supply. The primary competition to OPEC’s market dominance is emanating from suppliers of shale gas, particularly US-based producers of shale gas. While many commentators are forecasting that demand for oil will eventually slow down, at this point in time it certainly remains strong. The ‘peak oil’ time that many have predicted is still many years away suggesting demand for oil will continue to remain strong for the foreseeable future.
OPEC recently decided to cut its oil supply, abandoning the idea that it should pursue market share at all costs. This decision has benefited OPEC’s primary competitor- namely US shale. One can understand OPEC’s decision given its members, particularly Saudi Arabia, have previously experienced negative consequences as the result of a ‘pump-no-matter-what’ approach in order to secure market share. While the rig-count in the US continues to rise, OPEC has publically declared and demonstrated that it will stick to curtailing its oil supply in an attempt to boost oil prices and bring the market back into what it considers to be the ‘right balance’.
There is a view that this tug-of-war between OPEC and shale-gas producers could result in the former’s demise. However these predictions are unlikely to come to fruition. The major problem with shale-gas is that despite recent improvements and efficiencies it remains a comparably very expensive operation. Saudi Oil Minister Khalid al-Falih hit the nail on the head when he recently addressed the current situation in his speech at the World Economic Forum in Davos, Switzerland. Al-Falih rightly stated that it would take considerable time for US oil production to claw back the ground it recently lost to OPEC in the ongoing fierce competition between the two for market-share.
The comparatively low-cost producing OPEC reduced their oil production late last year by an estimated 1.8 million barrels a day with the aim of propping up oil prices. The consequential rise in oil to above US$50 a barrel led to an increase in the number of US-based rigs for shale production that had previously shut down due to their unprofitability. However this resulted in an exhausting of the most fertile reservoirs and an increase in costs for contractors involved in the oil production process. As al-Falih pointed out, this will mean that there will be an inflation of costs for US shale producers in the coming years at least.
OPEC members are old hands at the oil game. They have faced challenges like this before and have predictably triumphed. The shale-gas producers are the new kids on the block buoyed by early success. However, the highly efficient OPEC is playing the long-game and it will continue to remain the key market-player until (if ever) the world decides it no longer needs oil.