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The Oil War Is Only Just Getting Started

Oil infrastructure

It’s been a month now that investors and analysts have been closely watching two main drivers for oil prices: how OPEC is doing with the supply-cut deal, and how U.S. shale is responding to fifty-plus-dollar oil with rebounding drilling activity. Those two main factors are largely neutralizing each other, and are putting a floor and a cap to a price range of between $50 and $60.

The U.S. rig count has been rising, while OPEC seems unfazed by the resurgence in North American shale activity and is trying to convince the market (and itself) and prove that it would be mostly adhering to the promise to curtail supply in an effort to boost prices and bring markets back to balance. In the next couple of months, official production figures will point to who’s winning this round of the oil wars.

This would be the short-term game between low-cost producers and higher-cost producers.

In the longer run, the latest energy outlook by supermajor BP points to another looming battle for market share, where low-cost producers may try to boost market shares before oil demand peaks.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”.

“In a world where there’s an abundance of potential oil reserves and supply, what we may see is low-cost producers producing ever-increasing amounts of that oil and higher-cost producers getting gradually crowded out,” Spencer Dale, BP group chief economist said.

In BP’s definition of low-cost producers, the majority of the lowest-cost resources sit in large, conventional onshore oilfields, particularly in the Middle East and Russia. Related: Is The $4 Trillion Saudi Reform Plan Inspired By China?

Although this view that low-cost producers would try to seize more market share comes from an oil major with significant interests in Russia and Iraq, for example, BP may not be wrong in predicting that the abundance of oil resources would prompt the lowest-cost producers to pump the most out of low-cost barrels before the world starts to unwind from too much reliance on oil.

Oil demand growth is expected to slow down in the years to come. BP pegs the cumulative oil demand until 2035 at around 700 billion barrels, “significantly less than recoverable oil in the Middle East alone”.

Middle East OPEC production growth would account for all OPEC output growth by 2035, BP reckons, noting that other OPEC production typically has a higher cost base and its market share would drop.

The U.S. liquids production is expected to rise by 4 million bpd to 19 million bpd by 2035, with growth mostly in the first half of the period, driven by tight oil and NGL output.

So, both OPEC’s Middle East members and the U.S. are seen increasing oil and liquids production in the next two decades.

However, OPEC – especially Saudi Arabia – has the recent bitter experience of its pump-at-will policy for market share backfiring on its economy when oil prices crashed.

Another market-share war would involve too many unknowns, including supply-demand basics, leaner and meaner non-OPEC producers, oil price effects on oil-revenue-dependent economies, or rationale for investments in higher-cost areas. Related: OPEC May Be Powerless To Stop Lower For Longer

OPEC’s decision to deliberately cut supply and abandon the strategy of pursuing market share at all costs is currently benefiting the cartel’s competitor, U.S. shale.

Commenting on OPEC’s current and future relevance and influence on the oil markets, Wood Mackenzie said in an analysis last week:

“The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel. If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.”

Five or ten years from now, a possible market share ‘oil war’ would take place on a totally different battleground, and some regiments or battalions may lack essential armory to wage such war.

By Tsvetana Paraskova for Oilprice.com

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  • Amvet on February 01 2017 said:
    The writer forgot the demand in Africa and the developing countries in Asia. Peak oil demand in 5 years? A wild guess at best.
  • Eulenspiegel on February 01 2017 said:
    In 2035 US tights oil will long be on it's final decline, since sweet spots are long gone and the last reserves are being drilled. GOM will be in deep decline and conventional which still makes a lot of daily production will be decline further - no way to reach 19m BPD here.

    The gulf states will have to compensate for this.
  • Osama on February 01 2017 said:
    It means in the longer term we will see far less demand than the production of oil? This oil price war, then, really is just in its nascent stages as of today!!!
  • Dan on February 01 2017 said:
    Every day the sun is out and it's not snowing the roads fill up like everyone is trying to escape. Peak demand? We love to go.
  • Larry Evans on February 02 2017 said:
    Gimme a break. US Oil has the Mideast by the balls.

    They raise prices, we frack. They lower prices, Frackers go dormant. they raise prices again, Frackers start back up.
  • ghamilton on February 06 2017 said:
    The motivation behind America's next war and America's current and past wars is the same. Anyone who doesn't know that the war in Afghanistan (Caspian Basin), Iraq, and Libya, are, and were, about control of oil (who gets it and who doesn't) does not understand the motivations of the American Empire.
  • BenFranklin99 on February 07 2017 said:
    Solar keeps going down in price, and so do car battery banks for electric cars. My next car will be electric. Robotics are making cheap third world labor less and less competitive, so shipping costs will go down. Fracking and new oil discoveries are also driving oil prices down. Oil isn't going to come back, this time. King coal is already dying. The era of the internal combustion engine is drawing to a close, just as steam engines are now just quaint antiques.

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