In what appeared to be one of the least heated meetings in recent years, OPEC and allies rolled over this week their production cuts into March 2020, signaling that the oil market is still oversupplied and demand growth looks weaker at least for the rest of 2019.
OPEC's mission to draw down excess inventories, if successful, would lead to higher oil prices, which cartel members need to balance their budgets, most of which are overly reliant on oil exports.
Yet, higher oil prices are inadvertently helping U.S. shale production to continue growing, offsetting much of the barrels that OPEC is withholding from the market.
It looks like the cartel aims for higher oil prices now and will think of regaining market share later.
Currently, OPEC and its Russia-led non-OPEC partners in the production cut deal focus on reducing inventories and boosting prices, even if this means ceding market share and having OPEC's share of global oil production drop to below 30 percent for the first time since 1991, according to Bloomberg News estimates.
But OPEC's 'free pass' to U.S. shale will not last long, according to JP Morgan. In the medium term, the cartel and its de facto leader and largest producer Saudi Arabia will reclaim market share from U.S. shale, JP Morgan's head of EMEA oil and gas research Christyan Malek told CNBC this week.
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The Saudis and OPEC aim to "support oil while they are effectively pregnant with all this economic growth and capital they have got to deliver. But, having said that, what we are saying to the bulls is: Don't get used to it," Malek told CNBC's Squawk Box Europe.
The cartel is now "two feet in the value camp" looking to boost oil prices, but the level of 'acceptable' price of oil is dropping, Malek said.
"The bar keeps falling, it is just very gradual. In a few years' time I expect $50 to be an okay oil price, at which point that could see Saudi and OPEC reclaim that market share and then it becomes more competitive," JP Morgan's executive told CNBC.
"I have no doubt in my mind that U.S. shale will peak, plateau and then decline like every other basin in history," Saudi Arabia's Energy Minister Khalid al-Falih said in Vienna this week, as reported by Bloomberg.
OPEC may have to wait at least half a decade to a decade for U.S. shale to peak, as many estimates put shale peak at around 2025 or later.
But just waiting for peak shale to come is not sustainable for OPEC-the longer it waits, the harder it will be to reclaim global oil market share.
While the immediate OPEC goal is clear, analysts question if these cuts could be sustainable in the longer term and what the cartel's endgame is.
OPEC and allies "have no clear endgame other than to push back the inevitable time in which the age of supply abundance can no longer be held back," Ed Morse, Global Head of Commodities Research at Citi, told CNBC. Related: Why Natural Gas Prices Collapsed
The cuts are a "largely defensive" move, because the key drivers for OPEC+ producers now are their vulnerability to low oil prices and their insufficient revenues, Morse said.
The extension of the OPEC+ cuts should be viewed as constructive, Warren Patterson, Head of Commodities Strategy at ING, said, expecting higher oil prices from here for the rest of the year.
Yet, the market was unimpressed with the rollover of the cuts, to say the least-oil prices reacted in the worst way in years to an OPEC meeting, plunging more than 4 percent, as concerns about demand continue to trump any bullish sentiment.
"Then there is also the issue of how sustainable these cuts will be in the longer term, given that US producers will be more than happy to fill the void left by OPEC+ cuts," ING's Patterson said.
The higher the price of oil OPEC manages to squeeze from the market through the cuts, the more U.S. shale-encouraged by higher prices-will offset those cuts.
OPEC's endgame may not be clear, but its current goal of rebalancing the market (and propping up prices) comes with ceding ground to rival producers, most of all, to U.S. shale.
By Tsvetana Paraskova for Oilprice.com
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Comments
And while this would inadvertently be helping US shale oil production, this benefit will be short-lived. The reason is that despite impressive technological improvements, the industry is already seeing diminishing returns. Many pioneers of the industry and numerous authoritative sources are projecting a major slowdown in shale oil production. They overwhelmingly believe that US shale oil industry will never be a profitable one now or in the future.
This is inevitable given the steep depletion decline in US shale oil wells estimated at 70%-90% in the first year of production, declining well productivity, rising cost of production and declining acreage to allow for growth.
The fact remains that that technological improvements don’t change the fundamental characteristics of shale production. They only speed up the boom-to-bust life cycle.
The US shale oil industry has seen its best performance over the last few years but it is now in a state of decline with production projected to slow down to 10-11 million barrels a day (mbd) in 2019 and 10 mbd or even less in 2020.
The claim by the US Energy Information Administration (EIA) that current US production is 12.1 million barrels a day (mbd) is inaccurate since it includes some 2.1 mbd of natural gas liquids (NGLs) which come from natural gas wells as well as gases as ethane, propane, butane and pentanes. These gases don’t qualify as crude oil. In fact, major oil exchanges accept neither natural gas plant liquids nor lease condensates as satisfactory delivery for crude oil. And if major exchanges don’t accept natural gas liquids as crude oil, then they are not crude oil.
The verdict is that US shale oil industry could be no more in less than 10 years.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
I say "Up Yours" to OPEC