Global oil production outside the Organisation of Petroleum Exporting Countries (Opec) is headed for its biggest drop since 1992 this year as the US shale oil boom that added to the global glut is sputtering out, according to the International Energy Agency (IEA).
Saudi Arabia has chosen to boost output to keep market share from higher-cost producers. For the first time, it can argue convincingly that its strategy is finally bearing fruit.
US oil output has fallen for 11 weeks to its lowest since September 2014 and will average 8.5% lower this year than 2015, according to the Energy Information Administration (EIA). The pump-more-for-less Saudi strategy has now almost eradicated the global oversupply, spurring a price rally of 80% since January.
All but one of 27 analysts surveyed by Bloomberg said Opec will stick with the strategy rather than set output limits when ministers gather in Vienna on June 2.
“It might not look a victory compared with when oil was $100 a barrel, but the Saudi strategy is working as you’ve got significant production declines showing up in a lot of places, and prices are grinding higher,” says Seth Kleinman, head of energy research at Citigroup. Any action that raises prices would only rescue US drillers and jeopardise the return to equilibrium, according to Mike Wittner, head of oil market research at Societe Generale in New York.
But, in a wider sense, the US shale boom, which has brought the country closer to energy self-sufficiency than at any time since the 1980s, has curbed Opec’s ability to balance crude markets, Qatar’s former deputy premier and minister of energy and industry HE Abdullah bin Hamad al-Attiyah has said. “Opec can’t act as swing producer because it will lose the market share,” he said.
Amid the battle for market share, lower prices, for sure, can unsettle the demand-supply balance in the long-term. Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522bn, following a 22% fall to $595bn in 2015, according to the Oslo-based consultancy Rystad Energy. Opec members would see $500bn revenue shortfall in 2015, the IEA has said, putting intense pressure on national budgets. Trillions have been wiped off the value of oil companies around the world in the global rout.
For now, however, the Saudi-driven strategy of preferring market share to higher prices has finally started paying off. The alliance has relinquished its classic market balancing role. Instead, it might want non-Opec members to bear the brunt with a joint-production cut in future.
The “Opec-demise” theory is too far-fetched, though. The US currently accounts for just 10% of global crude production. The 12-member group still produces around 40% of the world’s oil and holds 80% of global oil reserves.
Here’s the new realty: Opec is still relevant, but in different ways. But the oil market will never be the same again.
LEAVE A COMMENT Your email address will not be published. Required fields are marked*
Risks of new Covid scare spark rate rethink in markets
Qatar drive for environment protection
Reeling in a deal to save the ocean
New Franco-Italian alliance in Europe
Green business after COP26
How global institutions die
Nature can’t wait, so we must move to protect it quickly
Scoping out corporate carbon neutrality