For almost two years now, the oil market has witnessed a relative stability rarely seen before.

The price of the Opec reference basket of 12 crude oils moved in a narrow range of between $104 (Dh381.68) and $109 a barrel. The oil price is kept within this range as production in the US soared to a level not seen for 28 years, while this is countered by increasing oil demand and by outages of production from other regions, especially in Libya.

More importantly, and especially since February, tension between Russia and the West as a result of the Ukraine crises has given further support to prices in anticipation of a worsening situation, though oil and gas exports from Russia have hardly been affected so far.

The estimates reported by both Opec and IEA are in close agreement, with oil demand likely to increase in 2014 from 2013’s by 1.14 million barrels a day (mbd) according to Opec and 1.32 mbd according to IEA. Demand for Opec oil is expected to be 29.76 mbd in 2014 as compared to 30.21 mbd in 2013, while according to IEA the two comparable numbers are 30 mbd and 30.45 mbd respectively.

Libya’s oil production dropped from 1.4 mbd to just 160,000 barrels per day recently amid political turmoil, which is becoming increasingly more violent. If Libyan production recovers, which does not look likely in the short term, Opec must be careful and an adjustment of its production ceiling cannot be ruled out.

However, it is too early for the upcoming Opec ministerial conference, which will convene on June 11, to make such an adjustment, but a discussion on the issue is certain to take place.

Reducing production

Opec does not like reducing production as its market share is important to all its members. However, the level of oil prices is even more important to members to balance their budgets. Therefore Opec will not shy away from reducing production if it finds it necessary.

If further sanctions are imposed on Russia, it may draw this country to co-operate more with Opec to stabilise the market at or close to the current level of prices.

But the tense situation in Ukraine is probably easing as Russia has accepted the result of the presidential election and even though more fighting is reported between government forces and pro-Russian opposition in the east, therefore rendering the situation uncertain.

Furthermore, Ukraine has started paying the accumulated gas debt to Russia and may pay all before the deadline of cutting its gas supplies. This is an important point as non-payment is the only condition where Russia is likely to be exercising its threats to cut supplies and which will definitely affect supplies to Western Europe, an eventuality that Russia does not want.

In the same direction, Russia is becoming more flexible as it adjusted gas prices downward for Italy’s Eni “in an agreement that brings prices in line with the market, signalling challenges for the decades-old structure of indexing the fuel to oil”. This may be a signal to adjust contracts with other countries and therefore making alternatives to Russian gas in Europe even more expensive.

There is no doubt that we are living in a “shale revolution” where US shale or tight oil production has increased from less than 0.5 mbd in 2000 to 2.4 mbd in 2013 and all forecasts suggest further increases. But it is not all rosy. The Los Angeles Times reported recently that “Federal energy authorities have slashed by 96 per cent the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits”.

Other estimates

The previous estimate of recoverable reserves was 13.7 billion barrels and now 600 million barrels only. The paper adds, “The Monterey Shale formation contains about two-thirds of the nation’s shale oil reserves” and “The new findings seem certain to dampen that enthusiasm” for shale oil.

The question is whether other estimates of shale oil and gas reserves are not “puffed up by the oil industry” or by the media, where we see statements such as “Move over, Opec” and “The sun may be setting on Opec dominance” in Motley Fool. Yet the same paper tells us “The breakeven price for most of shale oil in the US today ranges from $60 to $80”; “Compare that to Saudi Arabia, where the lifting cost — the total cost to physically take a barrel of oil from the well to market — is below $5.”

So, we will see if Opec will “move over”, especially when according to the American Energy Information Administration (EIA), US oil production will start declining after 2020 “as shale output starts to decline”.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.