Oil: Shale Versus Sheikh

Oil companies

The Organization of the Petroleum Exporting Countries (OPEC) will convene on Thursday this week and an extension of the supply deal seems to have become a formality only. Saudi Arabia and Russia last week pledged their support to maintain the production quotas. However, unlike the sharp bounce seen in late November, when the supply deal was announced first, oil prices have only reacted modestly so far. According to Julius Baer, “the lukewarm reception of the news reveals that the belief in a successful OPEC strategy is eroding.”

The main reason for the extension is the persistent supply surplus and the slower-than-expected rebalancing of the oil market. Oil storage in North America, Europe and Asia remain amply filled. Production growth from US shale basins, Canadian oil sands and Brazilian offshore fields undermine the Middle East’s restriction efforts. US oil production has bottomed earlier and is expanding more swiftly than initially foreseen. Most importantly, analysts at Julius Baer reminds that the additional 300 drilling rigs active mostly across US shale basins since late last November have yet to fully show their production impact. The latest official estimates show that shale output is set to surpass the previous 2015 peak by summer.

The past months reveal the new oil market realities where the responsiveness and competitiveness of the US shale industry prevent prices from rising sustainably beyond USD 50 per barrel. Libya and Nigeria return from supply disruptions and will likely add oil supplies in the near term. In consequence, experts believe that the supply cuts “will translate into market share losses” and the risks are “great” that compliance to quotas swiftly slips within the group. They explain:

We believe that quota compliance will be seriously tested going forward and that the scepticism about the supply deal’s effectiveness remains high. We stick to our neutral view and see oil prices trading be-tween USD 45 and 50 per barrel. Of course, any deeper cuts would support sentiment and oil prices, but only temporarily.


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