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Half the battle in global oil market dominance

By Sonny Atumah

In the last one week it was the usual interplay of the forces of bulls and bears in the global oil market. Tensions in the Middle East continued to weigh on oil futures.  The United States benchmark, West Texas Intermediate, WTI traded down by US$1.70 (-2.85 percent) at US$57.88 last Tuesday after reports that the US Secretary of State Mike Pompeo announced that Iran was ready to negotiate on its missile program.

oil revenue
oil revenue

The global benchmark, ICE Brent traded down US$1.75 (-2.63 percent) at US$64.73. On Wednesday, WTI was down by US$-0.43 (-0.75 percent) at US$57.19. Brent was US$-0.30 (-0.47 percent) at US$64.05. The push-and-pull dynamic that would ordinarily put crude prices in a sweet spot may hardly be realized because of the pressure to control prices and also dominate the global crude oil market share. It has become the chicken-and-egg situation for contending forces in global oil business in which it is impossible to know which of the two occurred first and caused the other.

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After Hurricane Barry eased in the Gulf of Mexico, the United States shale supply again increased tending to counter tensions in the Middle East that has threatened global oil supply. The offshore oil producers restarted four percent of the production shut by Barry last week, according to the U.S. Bureau of Safety and Environmental Enforcement, BSEE. Energy companies had slashed offshore Gulf of Mexico crude output by 73 percent, or 1.4 million bpd.

US crude oil production as estimated by the Energy Information Administration showed that production for the week ending July 05, rose slightly this week to 12.3 million bpd, just 100,000 bpd off the all-time high of 12.4 million bpd. The United States Shale or tight crude is now projected to get to an estimated high of 14 million barrels per day in 2020.

The United States has transformed into a major exporter within less than a decade due to the ability of the US shale industry to respond quickly to price signals by ramping up production. The issue for analysts is that tension over oil flows near the Strait of Hormuz is not affecting the United States directly because it no longer depends on imports from the region. Its Persian Gulf imports have slipped to less than 10 percent hovering around 1.5 million bpd in the fourth quarter, Q4 of last year meaning the United State is a lot more self-sufficient in oil.

The International Energy Agency, IEA latest Oil Market Report released July 12, says that global oil supply exceeded demand by about 900,000 barrels per day in the first half, H1 of this year. Despite the OPEC+ supply cuts agreed upon earlier this month, a slowdown of the global economy is dampening oil demand, leading to a larger-than-expected surplus in crude reserves. The shale revolution has made OPEC+ taking 1.2 mbpd out of the market almost irrelevant. For Q2 2019, data shows a global surplus of 500,000 barrels per day, a major departure from the previously predicted deficit of 500,000 barrels per day. Ordinarily oil prices would spike more than it is today with the same scenarios of unrest and uncertainty going on. But the boom in American oil production and slowing economic growth rate with consumption faltering in China and the trade dispute between the U.S. and China, it is now middle-of- the- road in prices.

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Giving its first 2020 forecasts in a monthly report last week, OPEC said the world would need 29.27 million barrels per day of crude from its 14 members next year, down 1.34 million bpd from this year. What appears to be a production war between the OPEC and the United States shale oil may survive in the short term. But it’s not just the U.S. that will expand production. New projects in Norway, Brazil and Australia will also contribute to the increase in non-OPEC supply. Rebalancing supply has become futuristic in the near term even after the OPEC+ meeting of early July in Vienna, Austria that rolled over production cut by nine months till March 2020, to avoid a build-up of inventories that could hit prices. For the OPEC cartel, the intent may be to get higher oil prices now by drawing down excess inventories and regaining market share later. That may be the magic wand but can OPEC wait till 2025 when the U.S. shale may peak? Analysts believe that higher oil prices would favour U.S. shale production to grow, and offsetting much of the barrels that OPEC is withholding from the market.

OPEC puts demand for its oil at 29.3 mbpd for 2020. OPEC may be forced to slash production further if it wants to head off a price slide. But the problem with OPEC is that its members are heavily dependent on crude exports to fund deficit budgets. Despite the perceived growth in production, it is not yet uhuru for American shale drilling companies. Some shale investors are slowing down and reeling from the shock of debt estimated to about US$187 billion. The desperation for who controls the price and market share another race  that may never be won.

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