VIENNA, (Reuters) – OPEC’s halcyon days of high prices and high production may be drawing to a close as soaring U.S. output opens a new era for world oil markets.
After a comfortable ride since the 2008 price crash and record revenue of $1 trillion last year, it may have to be more pro-active on output policy.
The rise of U.S. shale oil and slack demand will eventually force OPEC either to support oil at $100 a barrel by cutting output – offering higher price support to rival producers – or protect market share by keeping the taps open and allowing prices to fall.
The Organization of the Petroleum Exporting Countries’ Friday meeting was content to simply agree, as expected, to retain the group’s 30 million barrels per day (bpd) output target through the rest of the year.
It will meet again on Dec. 4. Ministers also agreed to set up a committee to investigate the impact of shale.
Oil is just above the $100 level favoured by the group that pumps a third of the world’s oil. OPEC’s leading producer Saudi Arabia says the world oil market is in “good shape”.
For now, maybe. But OPEC has little room to pump more due to the U.S. oil boom that has shifted the existing competition for marketshare once and for all to Asia and intensified a rivalry between OPEC’s top two producers Saudi Arabia and Iraq there.
Core Gulf producers think OPEC will still be able to pump at least 30 million bpd, provided U.S. shale grows at a moderate pace. While that does not leave much room for growth, it implies that OPEC will not need to scale back significantly.
“This is not the first time new sources of oil are discovered, don’t forget history,” said the influential Saudi Oil Minister Ali al-Naimi. “There was oil from the North Sea and Brazil, so why is there so much talk about shale oil now?”
There has not been such a surge in flows from outside OPEC in decades and that has rung the alarm with some members – particularly Nigeria and Algeria – that feel squeezed.
“The rapid ramp up in U.S. shale bears a striking resemblance to the situation in the early 1980s when North Sea oil production from the UK and Norway was rising very quickly,” said Neil Atkinson, director of energy research at Datamonitor.
“This presented OPEC with an enormous challenge because at the time demand growth was very weak. Nobody’s saying that will happen again, but all the ingredients in that brew are starting to come into place.”
Oil above $100 has freed vast quantities of U.S. shale oil in North Dakota and Texas that helped boost U.S. output by 850,000 bpd by the end of 2012.
That is more than each of OPEC’s two smallest producers, Qatar and Ecuador pump in total. Light, low sulphur shale poses no threat to OPEC’s Gulf members that sell heavier crude – but is a headache for Nigeria and Algeria, which produce oil of similar quality.
The surge may even push the United States closer to the Saudi mindset, thinking more like a producer than a consumer keen to keep oil cheap.
LEVELS OF PRICE PAIN
Last year’s surge in U.S. output came with a hefty price tag as the rush to produce drove the cost of pumping marginal crude to $114 a barrel, according to a Bernstein Research report.
While Riyadh welcomes the rise of U.S. shale, the Saudi oil minister himself has said the kingdom would be lucky to go beyond current production rates of about 9 million bpd by 2020 due to new global supplies.