Opec’s decision to push for production cuts last month has led many to declare the US shale oil industry as the biggest winner from a two-year price war.
The wildcatters of the US shale patch successfully cut costs and consolidated operations to weather the storm of $40 oil, leaving behind a leaner more resilient industry that should benefit as prices recover.
Opec members have come under severe financial duress, including the cartel’s largest producer and de facto leader, Saudi Arabia. Riyadh has conceded that a higher price is necessary, with the market downturn far more severe and longer lasting than anticipated.
But in an oil price war the winners and losers are never clear cut. In the past two years Opec has succeeded in taking a much bigger share of the market. That effort has come at a cost.
How have the big players fared over a very volatile two years in the oil market?
Producers outside Opec
Opec always knew that it could not destroy the US shale industry but sought instead to damp its rapid growth, which added more than 4m barrels to the market between 2010 and 2015.
The cartel’s strategy of pumping flat out arguably did exactly what it intended, squeezing higher-cost rivals — from the US to oil from Brazil’s deep waters, Canada’s tar sands and the Arctic.
While US shale fights on, forecasts for the industry’s output have been sharply revised lower from two years ago. Rather than growing by almost 1m barrels a day a year, US crude production has instead fallen by about 10 per cent from its peak of 9.6m b/d.
At the same time lower prices have seen global demand grow at its fastest pace in years, increasing by almost 3m b/d over 2015 and 2016, compared with annual growth well below 1m b/d before the price slump.
In the International Energy Agency’s medium-term report published in 2014, total non-Opec supply was forecast at 59.4m b/d in 2017. The global energy advisory body’s latest report now shows an estimate of 57m b/d next year.
The net result is an increased need for Opec barrels of more than 3mb/d in 2017 compared with the level analysts were forecasting two years ago.
At the same time there has been an near halt in investment into conventional oil projects that will not be quickly reversed, even should prices stabilise above $50 a barrel.
The money set aside to develop upstream assets between 2015 and the end of the decade has declined by $740bn since the oil price collapsed, according to research from Wood Mackenzie.
“Opec want as high a price as they can get without killing off demand,” says Jamie Webster, a fellow at the Center on Global Energy Policy at Columbia University. “That’s what they wanted two years ago and that’s what they still want now.”
Opec producers
By boosting its share of the market, the value of Opec’s barrels — based on output and average price — fell by a smaller percentage than US shale producers.
Since September 2014, when prices dropped below $100 a barrel, potential revenues for US producers declined about 55 per cent because of lower volumes and the drop in the benchmark WTI price.
In contrast, Opec’s are down by 48 per cent, with higher output helping partially to offset the price decline. Given that Opec’s total output is more than three times higher than the US, there is a stark difference in the hit.
In September Opec barrels — of which a large chunk provide export revenues — were worth approximately $43bn a month less compared with the same period in 2014. In the US they were $14bn lower, an impact largely felt by shareholders and small drilling companies rather than government budgets.
“You’re selling more crude oil but at a lower price, and you’re not making the budget requirements you have — and that ultimately is the point,” said Olivier Jakob, an analyst at Petromatrix. “For most of Opec the situation is still pretty dire.”
Strategic allies
The battle for market share has forged new alliances between producers and buyers.
In the US, the price fall arguably helped speed the repeal of 40-year-old curbs on crude exports, allowing the country’s oil to be shipped to customers in Asia and Europe on the largest scale since before the Arab oil embargoes of the 1970s.
US lawmakers hope that by freeing up the country’s energy bounty they will ultimately be able to reinforce political allies, including, in time, reducing Europe’s reliance on Russia’s energy supplies.
For Opec a fight for market share has forced members to strengthen ties with some of their biggest customers, as well as seeking out both old and new markets. Saudi Arabia’s state oil company is building refineries in China, India and Vietnam.
It has also sent more oil into north-west Europe, targeting customers in Poland and other regions that would normally be considered Russian buyers. Russia has responded by ramping production to a post-Soviet high, sending more oil to China. State-backed Rosneft recently bought a refinery in India to grab a foothold in one of the fastest centres of oil demand growth.
For African producers such as Nigeria and Angola, they have managed to reclaim space in the US market, where the surge in shale had previously cut off the need for their barrels. They have almost tripled exports to the US to a combined 300,000 b/d since the start of 2015.
“The downturn in prices has forced producers to think carefully about the alliances they want to build,” says Richard Mallinson at Energy Aspects.
Renewables
Perhaps the biggest battle facing Opec concerns renewable sources of energy that are seen as a curb on the need for oil over the coming decades. In the wake of oil prices slumping, Opec has been only partially successful in cutting investments in technologies beyond petroleum.
Opec has done little to stall the advancement of electric cars or renewable energy, with the latter overtaking coal as the biggest source of power capacity this year.
Globally, five times as many electric cars are expected on the roads by 2020 as there were in 2014 when the oil price slide started. Many analysts see oil demand peaking within 20 years.
“Oil is definitely still at risk of losing its unique competitive space in transportation,” says Bjarne Schieldrop at SEB bank in Norway.
That might be a long-term battle no one in the oil industry can win.
The wildcatters of the US shale patch successfully cut costs and consolidated operations to weather the storm of $40 oil, leaving behind a leaner more resilient industry that should benefit as prices recover.
Opec members have come under severe financial duress, including the cartel’s largest producer and de facto leader, Saudi Arabia. Riyadh has conceded that a higher price is necessary, with the market downturn far more severe and longer lasting than anticipated.
But in an oil price war the winners and losers are never clear cut. In the past two years Opec has succeeded in taking a much bigger share of the market. That effort has come at a cost.
How have the big players fared over a very volatile two years in the oil market?
Producers outside Opec
Opec always knew that it could not destroy the US shale industry but sought instead to damp its rapid growth, which added more than 4m barrels to the market between 2010 and 2015.
The cartel’s strategy of pumping flat out arguably did exactly what it intended, squeezing higher-cost rivals — from the US to oil from Brazil’s deep waters, Canada’s tar sands and the Arctic.
While US shale fights on, forecasts for the industry’s output have been sharply revised lower from two years ago. Rather than growing by almost 1m barrels a day a year, US crude production has instead fallen by about 10 per cent from its peak of 9.6m b/d.
At the same time lower prices have seen global demand grow at its fastest pace in years, increasing by almost 3m b/d over 2015 and 2016, compared with annual growth well below 1m b/d before the price slump.
In the International Energy Agency’s medium-term report published in 2014, total non-Opec supply was forecast at 59.4m b/d in 2017. The global energy advisory body’s latest report now shows an estimate of 57m b/d next year.
The net result is an increased need for Opec barrels of more than 3mb/d in 2017 compared with the level analysts were forecasting two years ago.
At the same time there has been an near halt in investment into conventional oil projects that will not be quickly reversed, even should prices stabilise above $50 a barrel.
The money set aside to develop upstream assets between 2015 and the end of the decade has declined by $740bn since the oil price collapsed, according to research from Wood Mackenzie.
“Opec want as high a price as they can get without killing off demand,” says Jamie Webster, a fellow at the Center on Global Energy Policy at Columbia University. “That’s what they wanted two years ago and that’s what they still want now.”
Opec producers
By boosting its share of the market, the value of Opec’s barrels — based on output and average price — fell by a smaller percentage than US shale producers.
Since September 2014, when prices dropped below $100 a barrel, potential revenues for US producers declined about 55 per cent because of lower volumes and the drop in the benchmark WTI price.
In contrast, Opec’s are down by 48 per cent, with higher output helping partially to offset the price decline. Given that Opec’s total output is more than three times higher than the US, there is a stark difference in the hit.
In September Opec barrels — of which a large chunk provide export revenues — were worth approximately $43bn a month less compared with the same period in 2014. In the US they were $14bn lower, an impact largely felt by shareholders and small drilling companies rather than government budgets.
“You’re selling more crude oil but at a lower price, and you’re not making the budget requirements you have — and that ultimately is the point,” said Olivier Jakob, an analyst at Petromatrix. “For most of Opec the situation is still pretty dire.”
Strategic allies
The battle for market share has forged new alliances between producers and buyers.
In the US, the price fall arguably helped speed the repeal of 40-year-old curbs on crude exports, allowing the country’s oil to be shipped to customers in Asia and Europe on the largest scale since before the Arab oil embargoes of the 1970s.
US lawmakers hope that by freeing up the country’s energy bounty they will ultimately be able to reinforce political allies, including, in time, reducing Europe’s reliance on Russia’s energy supplies.
For Opec a fight for market share has forced members to strengthen ties with some of their biggest customers, as well as seeking out both old and new markets. Saudi Arabia’s state oil company is building refineries in China, India and Vietnam.
It has also sent more oil into north-west Europe, targeting customers in Poland and other regions that would normally be considered Russian buyers. Russia has responded by ramping production to a post-Soviet high, sending more oil to China. State-backed Rosneft recently bought a refinery in India to grab a foothold in one of the fastest centres of oil demand growth.
For African producers such as Nigeria and Angola, they have managed to reclaim space in the US market, where the surge in shale had previously cut off the need for their barrels. They have almost tripled exports to the US to a combined 300,000 b/d since the start of 2015.
“The downturn in prices has forced producers to think carefully about the alliances they want to build,” says Richard Mallinson at Energy Aspects.
Renewables
Perhaps the biggest battle facing Opec concerns renewable sources of energy that are seen as a curb on the need for oil over the coming decades. In the wake of oil prices slumping, Opec has been only partially successful in cutting investments in technologies beyond petroleum.
Opec has done little to stall the advancement of electric cars or renewable energy, with the latter overtaking coal as the biggest source of power capacity this year.
Globally, five times as many electric cars are expected on the roads by 2020 as there were in 2014 when the oil price slide started. Many analysts see oil demand peaking within 20 years.
“Oil is definitely still at risk of losing its unique competitive space in transportation,” says Bjarne Schieldrop at SEB bank in Norway.
That might be a long-term battle no one in the oil industry can win.
