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The balance of powers in the world of oil has shifted away from OPEC and towards the Americas, particularly the United States. This is what Roubini Global Economics analyst Rachel Ziemba told Bloomberg, confirming what has been becoming increasingly obvious since November.
Falling costs in the shale patch, Ziemba said, have increased the international oil pricing power of U.S. producers, at the same time taking away much of OPEC’s leverage, as evidenced by Saudi Arabia—the cartel’s leader—which seemed to have been prepared to live with lower prices for a while, but only a short while. Once it started becoming clear that the market rebalancing would take longer than expected, the Kingdom found it was ready to continue cutting production instead of focusing on keeping its market share.
Ziemba also notes how OPEC underestimated the resilience of U.S. shale drillers, at least initially. It seems that when OPEC realized exactly how resilient these producers can be, it was too late to do anything constructive against them. What’s more, OPEC’s failure to rein in the U.S. producers and prop up prices has made privatization plans like Aramco’s much-hyped IPO much riskier than a few months ago.
This power shift in oil has also affected the traditional correlation between geopolitical tensions and oil prices. The latest events in the Gulf, the Qatar embargo, and the stalemate that the opposing parties are facing now due to Qatar’s unwillingness to accede to the demands of its neighbors and their inability to do anything about it, have not helped to lift oil prices much. If anything, Ziemba says, they’ve had a pressuring effect because the embargo has likely motivated higher production.
Geopolitical events have less of an effect on oil prices than they traditionally have had because of the glut. There is still so much oil around that the market doesn’t worry much about geopolitical problems. In a couple of years, Ziemba conceded, geopolitical factors might come to play a bigger role in oil prices again, but for now, their importance is on the wane.
By Irina Slav for Oilprice.com
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Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.