Will A Rise In Demand For OPEC Oil Eventually Help US Shale Industry Recover?

There could be a danger for OPEC if demand for its oil rises in 2015. The price could rebound to a level where US shale production could be revived, starting the whole cycle of a glut in crude all over again.

In its Monthly Oil Market Report issued Feb. 9, OPEC said low oil prices would encourage its customers, particularly the United States, to increase their demand for its oil, and that American production would decline.

The cartel’s report is notable not only because it increased its forecast on demand for its own oil, but also because it appeared to validate its strategy of waging a price war on American shale producers, who had turned the United States from OPEC’s largest customer to a nation nearly energy independent.

In a previous monthly report, OPEC forecast that demand for its crude would decline by about 300,000 barrels to 28.8 million barrels per day. The current report increases its demand forecast by around 100,000 barrels per day to 29.2 million barrels per day than in 2014.

Since June 2014, the price of oil has plunged from over $100 per barrel to below $60 per barrel, creating chaos in the market. There have been huge earnings losses for many energy companies, including those extracting oil from shale formations in North America and from beneath the North Sea, both of which are expensive and therefore less profitable as the price of crude declines.

As a result, according to the OPEC report, the amount of crude produced in the United States will rise more slowly in the coming year by 130,000 barrels a day less than the cartel had previously forecast as oil companies, seeking to save money, took drilling rigs off-line.

Americans aren’t the only losers named in the cartel's document. Lower revenues have forced multinational energy companies to pare deeply into their capital expenditures and even their work forces to remain profitable, it said, and depleted oil fields in Russia are producing less crude.

Lower oil prices have created some beneficiaries, though: American retail consumers, particularly motorists. OPEC has revised its forecast of US oil consumption in 2015 by 150,000 barrels per day. “Gasoline, in particular, remains a key driver behind the growth in U.S. oil demand,” the report said.

As a result, it said, total demand for oil is expected to increase by 1.17 million barrels a day to 92.32 million barrels a day.

So does this mean that OPEC succeeded in its strategy, decided at its meeting on Nov. 27, to keep production at around 30 million barrels a day, thereby allowing oil prices to fall in an effort to reclaim market share that it had lost to US oil producers?

The answer may be in the current price of oil, and how it reacted to the OPEC report. The price rose Feb. 9 for the third straight trading day. Brent crude futures jumped by nearly 1 percent or 54 cents, to $58.34 a barrel. At one point in the day it peaked at $59.61. And futures for US crude closed the day at $52.86, a rise of $1.17 or 2.3 percent. Before the close it had risen as high as $53.99.

If that kind of enthusiasm persists, the price of oil may rebound to a point where shale drilling in North America and the North Sea becomes profitable again. Wouldn’t that just restart the whole cycle of oil gluts and price wars?

By Andy Tully of Oilprice.com