Can OPEC Win Back Its Lost Market Share?

While the unrest in the Middle East lends an element of risk to the oil markets, helping to put a floor under prices, OPEC is maneuvering to keep the status quo. This week, OPEC's JMMC did not recommend any changes to the group's oil output targets during the quarter - as most had predicted. Second, Saudi Arabia announced that it was canceling its plans to boost capacity to 13 million bpd. 

This could be interpreted in any number of ways, whether that's because oil demand isn't what it needs to be to utilize the additional production, or because non-OPEC entities have increased production nearly as quickly as OPEC was cutting it. 

Has Saudi Arabia-and OPEC-been suffering from a case of magical thinking over the last couple of years while the United States quietly ramped up crude production from 11 million bpd in January 2021 to the current 13 million bpd?

Is OPEC ceding market share to U.S. shale yet again in the group's struggle to maintain a balanced market?

Back in January 2021, OPEC was producing 25.5 million bpd, with Saudi Arabia producing 9.1 million bd. And while the United States increased its rate of production by 2 million bpd since that time, OPEC has boosted its production to 26.7 million bpd-a 1.2 million bpd rise. This suggests that the group has indeed lost market share to the United States. The situation looks even worse for Saudi Arabia, however, which has seen its production drop to 9 million bpd within that time frame.

Clearly, Saudi Arabia has no immediate need for additional capacity, and OPEC's production plans-in an attempt to lift prices, have absolutely given U.S. shale the boost it needed to bring back production in full force. This, of course, despite shale players arguing that it is much more fiscally responsible than in years past when it pumped its way hastily into debt-some to their ruin. The only current play the group has is to fear-monger prices up, although the market seems to be displaying a weaker appetite for such moves. This used to be OPEC's go-to play for supporting market prices.

U.S. shale perhaps had an unwitting assistant in that the Biden Administration helped to strip OPEC of even more of its market share by draining the SPR by millions of barrels at a time when the group was trying to create a major deficit in the market to speed along the global drawdown so it could come roaring back more quickly.

Many forecasters and analysts are saying that oil demand is there, and of course, OPEC's forecasts support this notion. But OPEC will likely be unable to reclaim any lost market share by boosting production without sending prices falling. We should see the group managing expectations prior to the next meeting in an attempt to arrest any price drops from planned production increases. In the meantime, U.S. shale is expected to continue to slowly and methodically snag whatever market share OPEC leaves behind, leaving OPEC in a rather difficult position.