- 2018-10-17
OPEC is declining, or is it self-salvation?
The sluggish oil market is finally expecting good news: the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut crude oil production by 1.2 million barrels per day in the first half of 2017; Russia, Oman, and Mexico agreed to cut production by 558,000 barrels per day. The International Energy Agency (IEA) stated that if all parties abide by the agreement, the market may be short of 600,000 barrels per day in early 2017.
This is the first production restriction agreement reached by OPEC since the global financial crisis, marking the reversal of the policy direction of this Saudi-led cartel organization.
Some people believe that production cuts mean "the end of a hero", and the myth that OPEC dominates the oil market has been broken. Others believe that production cuts symbolize the "return of the king", which is precisely OPEC's pragmatic performance.
The impact of low oil prices on Saudi Arabia and other countries has already appeared in 2015. For these oil-producing countries, it is no longer necessary to continue to bear the losses caused by low oil prices because it has been discovered that low oil prices still cannot completely stifle American shale oil and have dealt a blow to the shale oil boom.
Two years of low oil prices have allowed OPEC to figure out the lower limit of U.S. crude oil production. U.S. crude oil production once reached a peak of 9.6 million barrels per day, but when low oil prices suppressed crude oil production to around 8.4 million barrels per day, it would be difficult to continue downward. Therefore, under such a current situation, it is better to raise oil prices appropriately to ease the pressure on the oil-producing countries themselves.
The impact of the previous decades on the market has brought OPEC's credibility endorsement. As long as the organization's production share still exists, its position will not be shaken by competitors, including the United States, which has advanced shale oil extraction technology. "The argument that'OPEC is going to the end' is not valid at least in the short term, unless new energy can completely replace traditional oil, which will take a long, long time. At present, the world's crude oil supply is OPEC, North America and other oil-producing countries. Divided into the world. OPEC still occupies one-third of the market share and enjoys a high right to speak, but its influence is not as great as before.
OPEC member states have fallen into a dilemma: reducing oil prices can increase market share on the one hand, but doing so will challenge social stability and fiscal sustainability. In the future, OPEC will need to make a trade-off between maintaining market share and maintaining crude oil prices, and whether the trade-off can be made is critical to its future.
Rising star
U.S. shale oil may be the biggest winner of this production restriction agreement. Analysis believes that as oil prices rebound, US shale oil producers are likely to increase production again.
The discussion about the impact of the American shale revolution on traditional oil-producing countries has never ceased. Thanks to the exploitation of shale oil, the United States surpassed Saudi Arabia in 2014 to become the world's largest oil producer.
This round of low oil prices has hit US shale oil producers to a certain extent. In 2015, Saudi Arabia announced that its strategy of squeezing out high-cost competitors was a success. The decline in prices has made investors shun shale oil, and the output of the US shale oil and gas industry as well as investment and financing activity have declined. Statistics show that from October 2014 to May 2016, the number of oil rigs operating in the United States fell by 80%.
However, Saudi Arabia has expressed optimism prematurely, and the tenacious vitality shown by the US shale oil industry is much stronger than previously expected. Innovations in exploration and production technology have reduced the cost of shale oil in the United States by 40%. According to estimates by the Federal Reserve Bank of Dallas, the break-even point of US shale oil has dropped from US$79 per barrel in 2014 to the current US$53.
"I understand that the cost of mainstream American shale oil should be around US$36-48/barrel. Some shale oil companies cost less than US$30, and the lowest is only around US$22/barrel. This is also a low oil price. In the cold winter, the reason why the U.S. shale oil industry can move forward stubbornly. Most shale oil in the U.S. will only show negative cash flow when Brent crude oil is less than $30/barrel. Of course, these are all unexpected. The Saudis were surprised." Li Yan told reporters.
U.S. shale oil has only gone through a process of "slimming" that is beneficial to long-term development, and it is still regarded as a new star with great potential for increasing production.
The conclusion of an agreement to limit production has boosted international oil prices. According to reports, the IEA said that compared with three months ago, American independent oil companies, including Anadarko Petroleum and Chesapeake, have increased their 2016 capital expenditure budget by 13%-20%. Some US shale oil producers also expect an increase in capital expenditures in 2017.
"Trump's coming to power will boost the development of shale oil and gas and traditional energy industries. The secretary of state will also strengthen international cooperation in this area. In the future, the United States will further export cheap shale oil and gas to Asia. This will not only help Asian countries' oil and gas resources. The diversification of sources also contributes to price stability in the oil and gas market." Cui Cheng, a researcher at the Energy Research Institute of the National Development and Reform Commission, told the 21st Century Business Herald reporter.
Affected by the oil crisis, the United States promulgated the "Energy Policy and Energy Conservation Act" in 1975, which initiated 40-year restrictions on U.S. crude oil exports. The ban was lifted on December 18, 2015, opening the way for the influx of American oil into Asia. Some foreign media said that BP will take the lead in launching complex long-distance shipping operations, delivering nearly 3 million barrels of US crude oil to Asian customers.