Oil is safe at $50 per barrel – Price not sustainable for coming 2-3 yrs

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Oil producing countries should be satisfied with the current oil price range of $50-$52 for the rest of the year. With shale oil production sailing smoothly and growing at a nice pace, USA oil production should reach more than 1.6 million barrels next year.

So far everybody is satisfied with the achievements. OPEC has managed to gradually reduce the overall surplus by cutting production by 1.8 million barrels along with Russia. This helped the oil price to stabilize at the current level of $50.

However, reduction by OPEC means further new customers for USA shale producers. For how long will OPEC stick to its agreement, which is expiring by end of the first quarter next year? For how long can OPEC members give way to its rivals, by eating their volumes and doing nothing? For how long will they incur heavy losses in revenues and face deficits in their annual incomes? The current price level of $50 per barrel is not sustainable for the coming two or three years.

The same can be said about the shale producers as they are not making profits in comparison to other producers of North Sea and African producers. They are earning less than $ 4.5 per barrel, which again is not enough with the USA oil price below $48 a barrel. They must improve on their earnings in the coming years. However, this is linked to the attitude of OPEC and for how long it can stay united.

It looks like the long battle between them will be never ending, if the annual growth demand for oil is 1.2 million barrels, which will be absorbed mostly by USA producers.

In the meantime, OPEC can’t further reduce production due to fear of a price level of $30 per barrel. Therefore, the oil organization has to live with its main rival — the independent shale producers.

While the USA producers are cutting costs in very possible way to improve on their earnings, OPEC producers have been increasing their expenses and borrowing more and more from the international banks.

For the rest of the year, oil price will remain close to its current range of $50 and $52. However, next year will certainly look different, as OPEC members will want more revenues and more income, which means more production. This is unless Saudi Arabia takes up its leading role of “swing producer” again.

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By Kamel Al-Harami

Independent Oil Analyst

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