“Shale oil, I don’t know how we are going to live together,” former Opec secretary general Abdalla Salem El-Badri told US oilmen in 2016.
The Organisation of Petroleum Exporting Countries, the producers’ alliance that pumps 40% of the world’s oil, is still in the lead when it comes to calling the shots in the oil market. But with the number of drilling rigs up almost a third over the last year, US production has surged above 10mn bpd, surpassing the all-time high set in 1970.
That, for sure, puts downward pressure on crude prices, disrupting Opec’s plans to rebalance the markets.
The shale boom is just booming. US supplies will dominate oil markets for years to come, satisfying 80% of global demand growth to 2020, the International Energy Agency said. Production from the prolific Permian Basin will double over the period and the country’s total liquid hydrocarbon output will rise to 17mn bpd from 13.2mn last year.
The American surge and a slightly weaker outlook for global demand growth make uncomfortable reading for Opec. The IEA slashed projections for the amount of crude needed from the group, indicating its supply cuts would need to stay in place until 2021 to avoid creating another prolonged surplus.
Opec has been dealing with US shale for almost a decade now. For the first few years, it downplayed the shale; in 2014, with the market oversupplied, it opened the spigots, sending oil prices to below $30 a barrel in a war for market share. Opec cut production in 2016 in an effort to revive prices.
Opec spent the last year making nice with its shale adversaries, but the US frenemies continue to increase output and grab market share.
In a sense, Opec created its own nemesis. The price crash of 2014 forced shale producers to reshape themselves into fitter, leaner and faster players that can thrive with a $50 price regime. As oil prices recovered, so did drilling.
It’s now clear that shale barons are fine with remaining free riders as Opec seeks to instil market discipline. In Houston, more discipline may come from pressure brought about by shale investors who are clamouring for returns, rather than just growth.
Here’s the flip side of the catch-22 situation.
Closer to 2023, global markets will start to tighten and the IEA has warned that more investment is needed to meet growth in consumption and to make up for production lost to natural declines. By 2023 the level of spare production capacity that could be used in the event of a disruption will be the lowest since 2007. The increasing risk: Prices will become more volatile.
True, few analysts realistically expect oil prices to return to the erstwhile $100-plus levels in the near future. But oil companies say global energy future envisages rising demand and population growth, making oil an important fuel for decades to come. Despite the emergence of renewables, global energy security depends mainly on fossil fuels for the foreseeable future.
The world is in need of a stable oil market with price equilibrium.
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