How long will OPEC continue to forfeit market share to the US? – Commodity News
March 15, 2018 2:26 pm
While OPEC and its allies have been restricting their output in order to rebalance the oil market, other major producers like the US have taken the opportunity to increase their own production. If this pattern continues, OPEC would likely see a substantial chunk of its market share taken over by the US. The last time this occurred back in 2014, OPEC “fought back”, flooding the market with oil to defend its share of the pie. Is history about to repeat itself?
Flash back to 2014. Oil prices are trading safely above $100 per barrel, and the US “shale revolution” is at its peak. While US production is not extremely high yet, it is in a clear uptrend, and OPEC recognizes that a continuation of this would not only be a threat to oil prices, but also to its own market share. So, OPEC decides to defend its share and increases its production dramatically, pushing WTI prices as low as $26 per barrel in early 2016.
Flash forward to today. Prices have recovered to currently trade around the $60 zone, mainly due to efforts by OPEC and other major players like Russia to rebalance the oversupplied market by limiting their output. The increase in prices though, has also invited many previously-unprofitable US producers back into the market. In fact, US production is now at an all-time high of 10.3 million barrels per day (mbpd) according to the latest EIA estimates, and is forecast to average 10.7 mbpd in 2018, a number that has been revised higher several times in recent months. In 2019, it is forecast to increase to 11.3 mbpd.
Looking at this from OPEC’s point of view, it presents a troubling conundrum. On the one hand, if you continue restricting your output while the US increases its own, your market share is likely to decline as more oil demand is serviced by the US. On the other hand, choosing to defend your share of the pie implies you have to increase production again and drive prices lower, hurting your own profits in the process. What is important here, is that both scenarios spell bad news for oil prices. If OPEC does nothing and allows US output to increase further, then rapidly rising US supply will probably cap any future rallies in oil, or even push prices a little lower. An OPEC that fights back though, would probably push prices much lower.
What is the cartel likely to do? A middle-of-the-road option seems the most logical. Increase your own production and push prices low enough to disincentivize US producers from dramatically increasing their own output, but don’t push prices so low that the market is oversupplied for years again, as that could hurt your own interests. This can be accomplished by simply not renewing the output-cut deal between OPEC and non-OPEC producers that is set to expire at the end of 2018. Even before then though, compliance with the deal may slip, meaning that while the agreement may officially remain intact, participating members could simply pump more than what was agreed (a frequent phenomenon with past OPEC deals).
Of course, there are upside risks for oil prices as well, and the most noteworthy relates to OPEC’s third largest producer, Iran. Following US Secretary of State Tillerson’s replacement with CIA Director Pompeo, there has been increased speculation the US will adopt a tougher stance on Iran. Such a shift may involve reintroducing sanctions on Iran’s exports, thereby removing a large portion of oil from the market and thus, boosting prices. Besides Iran, Tillerson’s departure is seen as increasing the likelihood of additional sanctions on Venezuela, and its own oil exports. Another upside risk for prices pertains to the US dollar. Since oil is denominated in dollars, a weaker greenback makes the precious liquid appear more attractive for investors using foreign currencies. The dollar has stabilized a little lately, but should it resume its broader downtrend amid trade and debt-sustainability concerns, that would be a factor exerting upward pressure on oil prices.
Beyond all these, risk appetite has also been a major driver of oil recently, evident by the correlation between WTI prices and major stock indices. Thus, how risk sentiment evolves will likely be critical for the oil market, and sentiment currently appears quite fragile amid protectionist woes and various political uncertainties.
Technically, WTI prices are trading within a symmetrical triangle, and a break in either direction could determine the precious liquid’s short-term bias. In case concerns of an oversupplied market intensify or if risk sentiment deteriorates, WTI may break below the lower bound of the triangle and head for a test of the $58.20 support territory, marked by the February 14 lows. Further declines could open the way for the round figure of $55, identified by the troughs of November 16. On the contrary, in case of supply outages in Iran or a recovery in risk appetite, WTI could break above the upper boundary of the triangle and aim for a test of the $64.20 hurdle, marked by the February 27 peaks. If buyers overcome this area, then resistance is likely to be found near WTI’s recent highs, at $66.60.
While OPEC and its allies have been restricting their output in order to rebalance the oil market, other major producers like the US have taken the opportunity to increase their own production. If this pattern continues, OPEC would likely see a substantial chunk of its market share taken over by the US. The last time this occurred back in 2014, OPEC “fought back”, flooding the market with oil to defend its share of the pie. Is history about to repeat itself?
Flash back to 2014. Oil prices are trading safely above $100 per barrel, and the US “shale revolution” is at its peak. While US production is not extremely high yet, it is in a clear uptrend, and OPEC recognizes that a continuation of this would not only be a threat to oil prices, but also to its own market share. So, OPEC decides to defend its share and increases its production dramatically, pushing WTI prices as low as $26 per barrel in early 2016.
Flash forward to today. Prices have recovered to currently trade around the $60 zone, mainly due to efforts by OPEC and other major players like Russia to rebalance the oversupplied market by limiting their output. The increase in prices though, has also invited many previously-unprofitable US producers back into the market. In fact, US production is now at an all-time high of 10.3 million barrels per day (mbpd) according to the latest EIA estimates, and is forecast to average 10.7 mbpd in 2018, a number that has been revised higher several times in recent months. In 2019, it is forecast to increase to 11.3 mbpd.
Looking at this from OPEC’s point of view, it presents a troubling conundrum. On the one hand, if you continue restricting your output while the US increases its own, your market share is likely to decline as more oil demand is serviced by the US. On the other hand, choosing to defend your share of the pie implies you have to increase production again and drive prices lower, hurting your own profits in the process. What is important here, is that both scenarios spell bad news for oil prices. If OPEC does nothing and allows US output to increase further, then rapidly rising US supply will probably cap any future rallies in oil, or even push prices a little lower. An OPEC that fights back though, would probably push prices much lower.
What is the cartel likely to do? A middle-of-the-road option seems the most logical. Increase your own production and push prices low enough to disincentivize US producers from dramatically increasing their own output, but don’t push prices so low that the market is oversupplied for years again, as that could hurt your own interests. This can be accomplished by simply not renewing the output-cut deal between OPEC and non-OPEC producers that is set to expire at the end of 2018. Even before then though, compliance with the deal may slip, meaning that while the agreement may officially remain intact, participating members could simply pump more than what was agreed (a frequent phenomenon with past OPEC deals).
Of course, there are upside risks for oil prices as well, and the most noteworthy relates to OPEC’s third largest producer, Iran. Following US Secretary of State Tillerson’s replacement with CIA Director Pompeo, there has been increased speculation the US will adopt a tougher stance on Iran. Such a shift may involve reintroducing sanctions on Iran’s exports, thereby removing a large portion of oil from the market and thus, boosting prices. Besides Iran, Tillerson’s departure is seen as increasing the likelihood of additional sanctions on Venezuela, and its own oil exports. Another upside risk for prices pertains to the US dollar. Since oil is denominated in dollars, a weaker greenback makes the precious liquid appear more attractive for investors using foreign currencies. The dollar has stabilized a little lately, but should it resume its broader downtrend amid trade and debt-sustainability concerns, that would be a factor exerting upward pressure on oil prices.
Beyond all these, risk appetite has also been a major driver of oil recently, evident by the correlation between WTI prices and major stock indices. Thus, how risk sentiment evolves will likely be critical for the oil market, and sentiment currently appears quite fragile amid protectionist woes and various political uncertainties.
Technically, WTI prices are trading within a symmetrical triangle, and a break in either direction could determine the precious liquid’s short-term bias. In case concerns of an oversupplied market intensify or if risk sentiment deteriorates, WTI may break below the lower bound of the triangle and head for a test of the $58.20 support territory, marked by the February 14 lows. Further declines could open the way for the round figure of $55, identified by the troughs of November 16. On the contrary, in case of supply outages in Iran or a recovery in risk appetite, WTI could break above the upper boundary of the triangle and aim for a test of the $64.20 hurdle, marked by the February 27 peaks. If buyers overcome this area, then resistance is likely to be found near WTI’s recent highs, at $66.60.
Related Posts: