Complex Made Simple

A new world order taking shape: Could OPEC play second fiddle to US’s oil boom?

Is the US getting ready to take over global oil production and leave OPEC in the dust?

US oil production is on track to spike to a record 13.4 million barrels per day by the end of 2019 Officials from Saudi Arabia and Russia reportedly discussed a possible scenario in which oil prices crashed below $40 per barrel The Hurmoz Strait is the main route for Iranian oil exports where $66bn were recorded in 2017 for the country’s oil exports, which represents 2/3rd of all Iranian exports

The oil war between the US and OPEC has begun.

But on the surface, it doesn't look that way. Wall Street cutting off financing for shale, OIlPrice.com reports. 

“The red ink accumulated by U.S. shale companies is making it difficult for them to access capital markets as investors are growing tired of the poor returns. New bond and equity issuances have ground to a halt, forcing more asset sales. If low oil prices persist, bankruptcies could begin to pile up,” it said.

 A growing number of cities and states are filing lawsuits against the oil majors, seeking damages related to climate change.  

Oil prices are still in limbo. Brent crude futures were down 1.4%, at $61.42 a barrel and U.S. West Texas Intermediate (WTI) crude futures were down 85 cents, or 1.6%, at $52.41 per barrel. Why? This time because U.S. Energy Information Administration (EIA) cut its forecasts for 2019 world oil demand growth and U.S. crude oil production, in a monthly report released on Tuesday.

Zawya reported the EIA lowered its 2019 world oil demand growth forecast by 160,000 barrels per day (bpd) to 1.22 million bpd and wound back its forecast for 2019 U.S. crude production to 12.32 million bpd, 140,000 bpd less than the May forecast.

No signs of even a skirmish. But wait.

America's oil booming, OPEC taking a backseat?

CNN Business said recently that the epic American oil boom is just getting started. OPEC, on the other hand, is stuck on the sidelines.

US oil production is on track to spike to a record 13.4 million barrels per day by the end of 2019, according to a recent report by energy research firm Rystad Energy, said CNN. Texas alone is expected to soon top 5 million barrels per day in oil production — more than any OPEC member other than Saudi.

The shale oil revolution has made the United States the world's leading producer, surpassing Saudi Arabia and Russia.

In May, the United States likely produced a record 12.5 million barrels of oil per day, the firm added. All but four million of those barrels were from shale oilfields.

“OPEC's oil production tumbled to 29.9 million barrels per day in May, the lowest level in more than five years, Rystad said. OPEC output is down 2.6 million per day since October 2018 — the month before oil prices crashed into the last bear market,” CNN said.

Additional US oil is now contributing to a supply glut that last week sent crude into another bear market.

 OPEC remains in retreat as the cartel tries to balance the market by putting a floor beneath prices.

Oil Price scenarios

According to Oil Price.com, a few weeks ago, OPEC+ was mulling the possibility of exiting the production cut agreement because the oil market was at risk of over-tightening.

“Now Saudi is scrambling to extend the cuts and may even unilaterally lower its own production further in an effort to head off a price slide,” said OilPrice.com.

BP said Saudi Arabia’s proved oil reserves were revised to 297.7 billion barrels at the end of 2018 from 266.2 billion a year earlier, only slightly behind 303 billion in Venezuela.

On Monday, officials from Saudi Arabia and Russia reportedly discussed a possible scenario in which oil prices crashed below $40 per barrel, a recognition that the market has rapidly deteriorated.

For instance, S&P Global Platts, as of now, estimates a surplus of 400,000 bpd in 2020, while the EIA puts the glut at a more modest 100,000 bpd. IHS Markit sees a whopping 800,000-bpd surplus.  Saudi Arabia trimmed output by 120,000 bpd in May from a month earlier. 

Khalid al-Falih, Saudi Arabia's energy minister, said on Friday that OPEC is close to a deal to extend production cuts.   

Brent, which has tumbled about 15% since late April to $63 a barrel, should finish the year at around $60 a barrel, according to Capital Economics.

 Potential crude disruption from the Gulf

Adding to OPEC’s conundrums are threats of disruptions in the Gulf region.

BBC reported there has been deterioration in relations between the US and Iran since April, when the US ended sanctions exemptions, effectively banning all Iranian oil exports.

Iran has threatened that if its oil exports are stopped, then no oil can pass the Strait of Hormuz.

There is now Military activity in the area around the Strait of Hurmoz. BBC reported that the straits links the ME’s crude oil producers to key markets in Asia, North America, Europe, and beyond, and only separates Oman from Iran by 21 miles.

“It has 2 shipping lanes, each 2 miles wide but deep enough to handle the world’s largest oil tankers, where 1/5 of total world oil exports go through, or 19 million barrels of oil per day, compared to 16 million in the Strait of Malaca and 5.5 million in the Suez Canal,” said BBC.

“The Hurmoz Strait is the main route for Iranian oil exports where $66bn were recorded in 2017 for the country’s oil exports, which represents 2/3rd of all Iranian exports.

BBC said that Iran threatened that if the US banned oil exports, no oil will flow out from the Persian Gulf, from the strait of Hurmoz.