Competition for control of the oil market

Rajinder Dhesi

OPEC’s policy of lowering output to use up excess oil inventories has resulted in a small revival of crude future prices. Brent crude is trading at approximately $64 a barrel, up from $45 a barrel in the summer. Talks were held this week between OPEC and Russia to continue production cuts of 1.8m barrels per day for a further nine months in an aim to raise oil prices further. Before the talks, Wall Street analysts suggested the tense relationship between the oil cartel, who account for 40% of world production, and Russia, the world’s single largest oil producing state, could result in a stalemate. Concurrently, there has been enormous recent growth of the US shale sector, which by 2025 is predicted to match the record Saudi Arabian growth at the height of their oil expansion. The outcome of this is uncertainty in the direction of oil prices in both the short and long term, with analysts seemingly unable to agree on estimates in this volatile market.

OPEC member states, with a few small exceptions, have been lowering output for the last 18 months. Net production is down 669,000 bpd. Spearheading this move is Saudi Arabia, who have cut production by 541,000 bpd alone. Without Russian support these measures would only be punitive, offering no real effect. OPEC requires a commitment from Russia to back an extension of cuts throughout 2018. From a Russian perspective, an end to cuts would be welcomed, given the close link between the Kremlin, Gazprom (who are majority owned by the Russian government) and large private firms such as Lukoil who recorded a profit 78% higher in the last quarter compared to the previous year. These firms it seems would like to continue an expansion of production, reaffirming their dominance in the sector. Complicating the situation further, is the Ruble’s floating exchange rate that fluctuates with oil price. Currently, the low value of the Ruble is benefitting Russian exports in the minerals and agriculture industries. As a result, OPEC and Russia will have to agree on compromises at the upcoming negotiations which are likely to result in the market remaining bearish.

Another possible outcome of negotiations which succeed in raising oil value is a negative rebound as US shale firms are incentivised to continue their dramatic rise in extraction. The USA is currently producing 9.48 million bpd of crude oil, the fourth highest monthly average since the early 1970s. If the rebound was to occur, analysts suggest that Brent Crude prices could fall as low as $45 in 2018. This reflects shale oil’s increased influence over prices in years to come. However, in-house reports by OPEC, which may have to be considered with a degree of scepticism, estimate that peak shale oil will occur as early as 2025, because producers are already focusing on drilling their best fields, where oil and gas can be extracted at the lowest cost. After this, shale will become harder to extract and consequently less profitable. After 2025, OPEC according to their own predictions, are likely to increase in market share again until at least 2040.

To conclude, there are a number of competing factors and parties involved in determining the price of crude oil. It appears that control of the oil market and the accompanied benefit of being able to dictate oil prices is what each actor would like, though recent trends suggest that is unlikely to happen. Furthermore, the nature of developments in crude oil technology and production is unknown; very few would have predicted the shale oil boom ten years ago.

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