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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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OPEC Set To Play The Waiting Game

Following OPEC’s decision not to cut production at its June 5, 2015 meeting in Vienna, oil prices should likely continue their descent that began in early May (Figure 1). Prices may fall into the $50+ per barrel range since there is no tangible reason for their rise from January’s $46 low.

BrentSpotPrice

Figure 1. Brent crude oil spot price May 1- June 1, 2015: Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Saudi Arabia’s longer view of demand and market share dominated the decision not to cut.

World oil production has undergone a structural shift from supply dominated by relatively inexpensive conventional production to increasingly more supply coming from expensive deep-water and unconventional production. Most conventional oil is located in the Arabian, Siberian and North Caspian basins (Figure 2) while deep-water and unconventional production is focused along the margins of the Atlantic Ocean and in North America. Related: Forget The Noise: Oil Prices Won’t Crash Again

SedimentaryBasins

Figure 2. Location map showing Arabian, Siberian and North Caspian sedimentary basins. Source: USGS.

(click image to enlarge)

This shift is at the root of the current price conflict between OPEC and North American oil producers. Since 2008, OPEC liquids production has been fairly flat until mid-2014 (Figure 3). Non-OPEC production outside of North America has been flat. Most production growth has occurred in the U.S. and Canada but it is not only from tight oil. Related: Three Eagle Ford Stocks Worth A Look

WorldLiquidsProduction2008

Figure 3. World liquids production since 2008 showing OPEC, non-OPEC minus the U.S. and Canada, and the U.S. and Canada. Source: EIA and Labyrinth Consulting Services, Inc.

(click to enlarge image)

The competition for OPEC market share is from Canadian oil sands, Gulf of Mexico deep-water and tight oil production. U.S. plus Canadian production has increased 6.2 million barrels per day (mmbpd) since January 2008. OPEC production has increased 2 mmbpd over that period with 1.3 mmbpd (65%) of that increase since June 2014.

Lower oil prices over the past year (Figure 4) have not yet resulted in any observable decrease in North American production. Higher prices over the last few months further complicate the situation for OPEC. The global production surplus has gotten worse, not better, in recent months but prices rose based on sentiment. Related: US Shale Will Not Bounce Back At Current Prices

CrudeOilPrices

Figure 4. Crude oil prices since June 2014. Source: EIA and Labyrinth Consulting Services, Inc.

(click to enlarge image)

It is true that U.S. production may be falling but a 3-month lag in reporting prevents us from seeing this. It is also true that OPEC may have limited capacity to increase their production further although Middle East rig counts have never been higher.

The only way for OPEC to significantly increase its market share is to undermine North American expensive oil production with low oil prices for at least another 6 months. This is why a production cut at this time made little sense to them.

By Art Berman for Oilprice.com

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  • Len B on June 08 2015 said:
    no tangible reason? NEW YORK, June 8 (Reuters) - Oil production declines from the largest U.S. shale plays are forecast to deepen for the third consecutive month in July even as rig productivity remains high, data from the U.S. Energy Information Administration showed on Monday.

    So everything we are being told in media is a flat out lie as too from GS! I thought productivity would overwhelm depletion and rig count does not matter? I thought oil must go to 45 or at 60 production will rise…oh and I thought China demand was waning? Nope up 6% for gas in April……on and on. Whats tangible is that EVERY reason why oil should have fallen below $40 has been 100% false.

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