Opec may be able to gain upper hand in shale battle
Once the global oil market emerges from the coronavirus crisis, it may be greeted by a surprising change: greater dependence on crude from the Organisation of Petroleum Exporting Countries (Opec).
For the time being, the Opec and its allies are relinquishing their share of the market in a bid to prop up crude prices, slashing millions of barrels of output as the pandemic crushes fuel demand.
They’d already spent the past three years forsaking sales volumes t o of f s et t he oi l gl ut unleashed by burgeoning US shale production. Before the pandemic, forecasters were projecting that the group would need to cut production further in coming years.
Yet the current upheaval could give Opec another chance. As the oil-price collapse chokes off investment in new supplies around the world, from the megaprojects of Big Oil to drilling by US shale wildcatters, some analysts see the cartel reviving its battered standing.
“From the point of view of oilmarket share, Opec will be a clear winner in the coming years,” said Michele Della Vigna, head of energy industry research at Goldman Sachs Group Inc. “Under-investment in the rest of the industry ultimately plays to their favor.”
It’s a message that the organisation should still treat with caution. Warnings abounded during the last decade that the plunge in investment which followed the 2014 oil-market crash would leave a supply gap for Opec to fill. But the shortage never materialised as American shale proved surprisingly resilient.
Instead, the 60-year-old organization—led by Saudi Arabia and other West Asian exporters —found itself in late 2016 forming an alliance with erstwhile rivals, such as Russia, to curtail production.
Last week this 23-nation network, known as Opec+, reaffirmed it will keep output capped all the way through to 2022.
The group’s monitoring committee meets again on June 18 for another review of the market.
It’s too early to tell whether the latest predictions of a supply gap will prove unfounded, or whether this time really is different. But initial indications do suggest that Opec could re-emerge from the current round of cutbacks in a stronger position.
Goldman Sachs forecasts that this “call on Opec” may instead climb roughly 17% between 2019 and 2025, reaching 34 million barrels a day.
Investment delays amid the downturn have paved the way for a supply shortage in future years, said Per Magnus Nysveen, head of analysis at Rystad Energy A/S.
In that environment, Opec nations like Saudi Arabia and the United Arab Emirates—with much lower production costs and massive hydrocarbon resources—may be best placed to grab market share.