2015 Oil Market Rebalancing
[fusion_text]Kurlan Barbosa | ENREMA LLC
Sweet crude has never tasted so sour. With global layoffs exceeding 100,000 jobs and rising, and oil trading at $50/bbl, many people in the oil industry are wondering, when will we see an end to another oil depression?
It all started in 2008, with the development of advanced techniques of hydraulic fracturing and the perfection of horizontal drilling. This allowed the United States, the world’s biggest importer of oil at the time, to tap into plays that were previously uneconomical, mainly shales. This forward step increased U.S. oil production by over 70% and has reduced oil import from OPEC (Organization of the Petroleum Exporting Countries) by 50%.
The shifting of more domestic oil consumption led to a game of musical chairs between countries which led us to, in the end, all fall down. With the increase in shale oil production in the United States, we started importing less of its crude equivalent from African countries such as Nigeria and Angola. These African countries, in order to continue meeting their export quotas, turned to Asia’s marketplace – mainly China that historically imported its majority of oil from Saudi Arabia. Saudi Arabia in turn, lost a major amount of exportation volumes: China now had other parties it could tap into and the United States can self-supply for a certain amount. This led to Saudi Arabia overproducing and lowering their selling prices in order to get its major customers back and to compete with the higher production output volumes from the U.S. and Canada.
Due to the over flooding of the market with oil production and demand not increasing, economics 101 went into effect: oil prices lowered, drastically. WTI went from trading at $100/bbl in July to $65 in December 2014. This affected every oil producing country negatively. As of today, every country is operating at a loss, the only difference is the amount of the loss. Currently, Saudi Arabia’s plan is to keep its prices low to discourage U.S. producers and have importing increase. This would then allow for Saudi Arabia to cut production and allow for an increase in price. The Saudis are able to offer lower prices because the United States has to invest in horizontal drilling and hydraulic fracturing to access its shale resources. Meanwhile Saudi Arabia has less overhead because most of its wells are produced from conventional resources.
Historically, OPEC has set production quotas for its members so they could regulate market prices in a favorable fashion. Due to recent increased competition, members of the cartel have been allowed to go past these quotas. OPEC Secretary General Abdalla El-Badri went so far as to block appeals from poorer members to enforce production quotas, which would lead to a rebound in oil prices. Members of OPEC who are suffering the most include Nigeria, Ecuador, and Venezuela, who need the trading price to be around $120/bbl while Iran needs the price of oil to be $135/bbl.
For 2015, there could be three major turning points which could help shape the jobs and futures of thousands of people:
• Producers might tend to want to “wait the oil prices out,” meaning oil will still be sold at a cheaper price creating more demand, this higher demand will lead to a rebound in prices.
• Political tensions in countries such as Venezuela, Nigeria, and Libya, along with ISIS attempting to disrupt infrastructure in Iraq could disrupt OPEC oil output.
• Nigeria, Venezuela, and Ecuador have requested an emergency OPEC meeting before its planned June meeting to discuss cutting production to allow a rebound in the price of oil.
The appeal and pressure of OPEC’s own members will hopefully carry some weight with Saudi Arabia, who as a member, should abide by OPEC’s mission “to ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return for those investing in the petroleum industry.”
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