OPEC un­likely to lose oil in­flu­ence

The China Post - - COMMENTARY - BY ROLAND JACK­SON

OPEC’s an­nounce­ment that it is keep­ing crude out­put lev­els un­changed again, de­spite a col­lapse in oil prices, re­flects the grow­ing in­flu­ence of boom­ing U.S. shale but an­a­lysts say the car­tel is still the dom­i­nant player.

The 12-na­tion Or­ga­ni­za­tion of Petroleum Ex­port­ing Coun­tries (OPEC) switched its pro­duc­tion strat­egy in Novem­ber in or­der to push down prices and hurt high­cost U.S. shale pro­duc­ers, who need el­e­vated prices to make their op­er­a­tions prof­itable.

OPEC ditched its tra­di­tional role of sup­port­ing higher prices to boost rev­enues, and in­stead left its out­put ceil­ing un­changed at 30 mil­lion bar­rels per day (mbpd) — de­spite the col­laps­ing oil mar­ket and a stub­born global sup­ply glut that is fu­elled partly by U.S. shale.

The pol­icy was ex­tended last Fri­day when the car­tel of pro­duc­ers from Africa, Latin Amer­ica and the Mid­dle East de­cided to leave the taps open, spark­ing ques­tions from some quar­ters about the in­creas­ing in­flu­ence of U.S. shale on the oil mar­ket.

OPEC’s dozen mem­bers pump a third of the world’s crude oil.

OPEC Weak­ened by US Shale

Boom

The United States has sig­nif­i­cantly ramped up its pro­duc­tion of oil ex­tracted from hard-to-reach shale, or sed­i­men­tary rock, now pro­duc­ing 5.0 mil­lion bar­rels per day, mak­ing the coun­try far less de­pen­dent on im­ports from the crude-rich Mid­dle East.

But Cap­i­tal Eco­nomics com­modi­ties an­a­lyst Thomas Pugh also down­played talk that the U.S. shale boom could weaken OPEC’s stand­ing.

Fawad Raza­qzada, tech­ni­cal an­a­lyst at trad­ing web­site FOREX. com, con­ceded that the car­tel was less pow­er­ful than it used to be, due in part to strong oil out­put in non-OPEC mem­ber Rus­sia, but it still re­mained a “dom­i­nant force.”

“OPEC is clearly in de­fense mode as it tries to main­tain mar­ket share by pump­ing more oil than is needed,” Raza­qzada told AFP.

“The car­tel is los­ing some in­flu­ence to the U.S. shale oil mar­ket and to a lesser de­gree Rus­sia, but it still re­mains a dom­i­nant force — just not as pow­er­ful as be­fore.”

Over the past five years, the United States has en­joyed a shale oil and gas boom, rev­o­lu­tion­iz­ing the global en­ergy sec­tor but adding to the global glut that has plagued the mar­ket.

That boom caught OPEC min­is­ters by sur­prise, Iraq’s Oil Min­is­ter Adel Ab­del Mahdi ad­mit­ted in Vi­enna on Fri­day.

“We were two years late on eval­u­at­ing shale oil, that’s why it came al­most as a shock,” Ab­del Mahdi told re­porters.

“It should not have been a shock given that we knew they were work­ing on (ex­tract­ing) shale oil. Now this is the re­al­ity and we have to take it into con­sid­er­a­tion.”

In re­cent years, OPEC has shrugged off talk that the U.S. shale en­ergy revo­lu­tion would weaken the in­flu­ence of the car­tel but min­is­ters changed tack last week, ar­gu­ing that it was a phe­nom­e­non that was to be wel­comed as part of the global en­ergy land­scape.

Plagued by de­mand wor­ries and over­sup­ply, the oil mar­ket col­lapsed 60 per­cent be­tween June 2014 — when West Texas In­ter­me­di­ate (WTI) crude stood at about US$106 per bar­rel — and late Jan­uary, when it hit a six-year low of un­der US$45.

Prices have since re­cov­ered, but only to around US$60, but an­a­lysts ar­gue shale oil ex­plo­ration is still prof­itable at this level.

“It has been a re­mark­able revo­lu­tion in the United States,” said Chevron chief ex­ec­u­tive John Wat­son last week.

“We are pro­duc­ing close to 5.0 mil­lion bar­rels per day that no one ex­pected, and shale oil will be a bal­anc­ing mech­a­nism to some de­gree over the next few years.”

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