Whenever oil prices drop below $100 a barrel these days, it seems like an unofficial benchmark has been breached, denoting some significant shift in the market, with implications for the Gulf economy and finances.
Its decisive occurrence now is being associated with the sluggishness of world demand on the one hand, but especially the massive growth in US shale on the other.
So much so that the relative supply glut has driven a wedge into Opec, in terms of whether the group’s members will curb their own output, or structural dislocation will impel exporters to chase market share instead.
The international media is abuzz with chatter on whether Saudi Arabia is seeking by way of such a strategy to drive out marginal production, in a tactical move for the medium term, or even working in tandem with the US to pursue geopolitical aims.
Few can be sure about the true state of play, either in terms of shale’s underlying viability, or the calculations being made by officials, or naturally the likely prospect of the world economy. In the meantime, plenty of well-informed sources are having their say.
Opec itself has referred to alarm bells ringing, considering the “very fabric of the trading structure” to be under threat, while pointing at speculators for stoking the price decline.
Remarks urging “the help of all other stakeholders, to show the same level of commitment, especially in such challenging times [in] a multilateral world” signify an unmistakable regret towards developments, which “risk placing us all on a slippery slope”. The degree of concern is palpable.
Leaving aside whether the US could feasibly be a partner in rectifying the market — given the private dominance of its energy sector, and the implied tax cut effect benefiting its economy — the potential of its new-found resource exploitation carries much weight in the attendant discussion.
It’s worth noting the remarks of Ali Aissaoui, senior consultant at APICORP. “The maximum production cost of MENA conventional oil is put at $25 per barrel; that of non-MENA conventional could be as high as $70 per barrel. Maximum cost estimates for more expensive unconventional oil range from $70 per barrel (for CO2-based enhanced oil recovery) to $90 (for extra-heavy oil and ultra-deep oil), while that for light tight oil (LTO), kerogen-based oil, gas-to-liquids (GTL) and coal-to-liquids (CTL) has been put at $100,” he says, citing updated IEA data.
On that basis, prices currently would squeeze margins drastically, so that a period of trading at lower levels might well have the desired effect from the Gulf’s viewpoint, of thereby returning to a higher plateau.
That said, others don’t regard an $80 barrel as prohibitive for US shale, with fixed costs already substantially sunk. Barclays analysts, for instance, say “US production will continue to grow at a swift pace through 2015 H1 [as] producers are likely to take a long-term view with regards to their capex decisions.”
Neil Atkinson, head of Datamonitor Energy, sees the story now as rather a simple case of supply and demand fundamentals, no conspiracies attached.
The current $83 level (Brent) is merely a “staging post towards $75, anytime soon”, he told me last week, possibly heading further down, unless and until Saudi Arabia decides to intervene.
The realisation is that “Opec cannot control, only influence prices these days,” he says, and with only operating costs really to compare against, it’s very possible that most of US shale is still viable at sub-$50, although such a figure would inhibit ongoing investment plans.
Even if Opec announced a reduction in its production target later this month, the likelihood is that it would not match the increase, of over 1mbpd, due primarily from North America next year, Atkinson suggests. “It would only be running to catch up with next year’s reality”, bearing in mind the possibilities for enhanced Iranian and Libyan output perhaps pending as well.
Another line is taken by Bassam Fattouh, director of the Oxford Institute for Energy Studies, in a detailed paper last month. He argued that “the view that the US oil shock could erode the revenue base of the GCC, and consequently destabilise it, is rather simplistic.” On its own, it could not move the market sufficiently to persistently lower ranges, even though it prompts greater competition and re-routing of trade flows.
Equally, though, if there is a problem, it derives partly from within the Gulf, he indicated, which therefore by implication has a chance to resolve it. That refers essentially to the region’s revealed tendency to be consuming its own product faster these days, partly because of inefficiencies, while the production outlook is restrained by financial, technological, staffing and business environment issues.
Much to ponder all around. Whatever the discernible reality, the run-up to the Opec meeting on November 27th and beyond will inevitably be grabbing our attention, with colliding theories, uncertain practical outcomes and undoubtedly important ramifications.
