Where is oil headed?
In today's Finshots we talk about OPEC+, shale oil producers and the kingmakers who may dictate oil prices in the future
The Story
Every oil story starts with an introduction. And we begin today with…
1. OPEC
OPEC is a cartel that includes 14 nations, predominantly from the Middle East whose sole responsibility is to control prices and moderate supply. They can do this because these countries control most of the global oil supply.
2. OPEC+
OPEC+ is another cartel of 24 oil-producing nations, made up of the 14 members of OPEC, and 10 other non-OPEC members, including Russia. Big oil producers as well.
Last year, after prices breached historic lows, members of OPEC+ got together and decided to co-operate in a bid to ease their burden. The idea was to cut supply in bits and pieces and help push oil prices higher, thereby making oil production a more profitable enterprise.
And guess what? It worked. From less than $30 a barrel to ~$74 a barrel, oil prices have been on a remarkable recovery. And now that members of OPEC+ are slated to meet once again, everyone’s speculating on what their future course of action may look like.
Will they help rein in prices by drilling more oil?
Or will they push prices further by sticking to production cuts?
At this point, however, you could turn around and ask — “Why would the OPEC+members even want to create excess supply? Isn’t it better if they simply let prices run for another year or so? That would be a more profitable endeavor for the oil-producing countries no?”
Well, it would. But that’s not a wise idea. Artificially inflating prices will surely be lucrative in the short run. But it also has the capacity to dent the global economic recovery in a massive way. If people don’t fly, commute, and use oil because it’s too damn expensive, that might jeopardize demand in the long run. So they have to walk this tightrope rather carefully. And their role in this equation becomes all the more significant when you realize that US oil producers may not have a massive role to play this year.
Let us break it down for you. US shale oil producers almost always show up when prices breach the $60–70 mark. However this time around, they're being extremely cautious. And the reason…
Well, it’s complicated.
Shale oil production isn’t like your regular oil drilling. This is extracting oil from reservoirs that were once thought to be inaccessible. But between 2011 and 2014, prices of oil soared to such stratospheric highs that drilling oil from these vaunted sources also became profitable. And US companies began investing massive sums of money in exploring and extracting oil from shale.
But not everything is rosy here. When oil prices tank, shale oil production becomes an untenable proposition. Companies are often forced to borrow money to stay in business and expansion becomes an afterthought. Historically, however, despite the troubling landscape, they’ve managed to stay afloat and are often credited for helping moderate prices by pushing new oil into the market. But this time, that may not happen.
Because reports allege that they might have finally had enough. Last year, when oil prices tanked and crippled them financially, they made a promise to be prudent, if prices rose in the future. And believe it or not, they seem to be holding on to that promise. As one article in oilprice.com notes —
Listed producers generated record cash flows, but they are not reinvesting most of those back to drilling. Instead, shale operators are now channeling cash flow toward reducing debts and rewarding shareholders.
So yeah, shale producers aren’t going to be buzzing with activity this year. And the actions of OPEC+will likely assume more significance. That’s it from us today. We will see you tomorrow.
Until then…
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Correction: The article has been updated to accurately reflect the nature of shale oil drilling. The error is regretted