The Dynamics of The Oil Market
The world oil map is changing. The Oil Producing and Exporting Countries (OPEC) cartel is no longer powerful or effective in manipulating the markets as it had done in the past forty years.
According to Bloomberg August 1st 2019 “OPEC’s output, already at the lowest since 2014, slid again last month as U.S. sanctions took a further toll on exports from Iran.” A Reuter’s survey in July “the 14-member Organization of the Petroleum Exporting Countries pumped 29.42 million barrels per day (bpd) this month.”
The cartel’s production at the end of July/early August 2019 has fallen to 29.87 million a day, the lowest in five years. OPEC’s share of the global oil supply was over 34 million barrels per day a few years ago. Now it is just a little above 29 million barrels per day.
OPEC supplied over 40% of the global oil production less than 5 years ago, now it supplies under 30% of the global oil production. The London FT thinks that extending the oil production cut in early July by OPEC and Russia for another 6-9 months confirms the shift in power within the market away from the producers.
Forget the myth that Saudi Arabia is the swing producer that can influence oil prices at a stroke or a whim. It is no longer the largest producer, but remains the biggest single exporter. It exports around 7 million barrels per day. The US buys less and less Middle Eastern oil.
Why Are Prices Not $100 or $150 Per Barrel?
With all the geopolitical tensions in the Arabian Gulf, there were Iranian threats to oil tankers passing through the Strait of Hormuz, the sabotaging of vessels in Fujairah in May and the seizure of the British flagged tanker Stena Impero by Iran’s navy in July. After all that, one is entitled to ask why prices haven’t risen to 100 or 150 dollars per barrel? Should all the problems in Libya, Nigeria, Venezuela, and bottlenecks in Texas and Oklahoma mean we can expect oil prices to reach new heights?
But prices remain stubbornly stable and lower than they should be, according to conventional wisdom.
The OPEC-Russia agreement to curtail oil production by 1.2 m barrels per day until the autumn of 2019 hasn’t had much impact either. Prices remain within predictable levels hovering around $60 per barrel for the benchmark Brent. And $56 for US WTI (Western Texas Intermediate). The reasons quoted in the Press on August 14th include disappointing economic data from China and a rise in US crude inventories. That neutralized gains in previous trading sessions on signs of an easing in Sino-US trade tensions.
At the time of writing, Brent crude was down 64 cents, or 1 percent, at $60.66 a barrel at 0446 GMT, after rising 4.7 percent on Tuesday, the biggest percentage gain since December.
US oil was down 75 cents, or 1.3 percent, at $56.35 a barrel, having risen 4 percent the previous session, the most in just over a month. So why haven’t prices risen to $100 per barrel or more?
World Oil Map Is Changing
The answer lies in the fact that the world oil map is changing.
The other factor that kept prices down is President Trump’s trade war with China which has dampened surging demand for oil.
The global production is now around 100 million barrels per day and is enough to meet world demand. The International Energy Agency (IEA) reduced its oil growth forecast for 2019 from 1.5 million barrels per day down to 1.1 million barrels.
Furthermore the rapid increase of US shale oil output has helped to keep the prices down.
Oil From Outside OPEC is Rising
The rising stars of oil are now USA and Russia. Russia produces over 11 million barrels per day. The shale oil revolution in the USA has enabled the country to export significant quantities of light crude and to reduce its imports from the Middle East.
The escalating production of shale oil has hit OPEC hard. The American Energy Agency announced recently that the US produced 12.2 million barrels per day.
The Texas Permian basin produced 5 million barrels per day which is nearly 40% of total USA production. The USA is still the biggest oil consumer of oil and at the same time it exports over 3 million barrels a day in addition to exporting LNG. The US exports light shale crude oil and imports the heavier blends for its refineries which were built years before the onset of the shale oil fracking revolution.
A recent API report indicated that the US is determined to press ahead with projects to raise oil production.
Also the US is a major exporter of LNG (Liquefied Natural Gas). Natural gas exports averaged 9.9 Bcf/d (billion cubic feet per day) in 2018. The exports touched 11.7 Bcf/d in December 2018.
Meanwhile Russia produces to full capacity some 11.2 million barrels per day and is not in a position to raise production substantially.
Brazil, according to IEA is producing 2.8 million barrels a day and there is potential for producing 3 million barrels per day. Brazilian oil output exceeds that of some of OPEC’s own members.
Tensions in The Gulf Threaten OPEC Exports
Among the OPEC producers only Iraq managed to raise its output from 2.9 million barrels per day in 2009 to 4.5 million barrels per day in 2019.
Gulf exports of oil are under threat due to the tensions in the Gulf and the Iranian threats to prevent oil exports through the straits of Hormuz. The cost of transportation and insurance have rocketed in recent weeks. Oil buyers will seek new sources from outside the region.
Saudi Arabia, and UAE are studying alternative routes which include increasing the capacity of existing pipelines linking the Gulf with the Red sea. But the long term projects include canals linking the Arabian Gulf with the Red Sea. Saudi Arabia intends to establish a 1,000 km-long canal linking the Gulf with the Arabian Sea, passing by the Kingdom to facilitate transport of oil, avoiding the Strait of Hormuz. Such projects take years to complete and according to some estimates would cost from $80 billion to $200 billion.
There is no denying that oil market dynamics are changing, the United States is now the biggest oil producer. Technological advances have reduced the cost of producing shale oil. Shale oil producers can make a profit if the prices are in the range of $50-60 per barrel. Five years ago they needed a minimum price of $65 per barrel to break even. In the short-term, the outlook for oil producers in the Middle East is grim.