Better to keep it underground, for now
OPEC should stick to its current oil production of 34 million to 35 million barrels per day, with smallest possible spare capacity, as oil will stay below $70 per barrel under the current USA administration which will fight any price level above $70.
At the same time, shale oil production has been exceeding five million barrels, and the USA production is at a steady rate of 12 million barrels which could go higher, making the US top oil producer at a position beyond the reach of Russia and Saudi Arabia.
The US shale oil is being allowed to lead the oil market, while OPEC has to remain constant without investing further or producing any surplus oils. Why should OPEC be exposed to further harassment and threat of fixing or trying to fix oil prices? With the oil demand to remain weak this year and next, there is no need for Saudi Arabia, Kuwait, the United Arab Emirates and Iraq to increase their production beyond their current volumes. There is no need for Saudi Arabia to achieve production of 12 million barrels or for Kuwait to go beyond three million barrels.
There is no need for us to spend more money on upstream, as the oil prices will not reach the breakeven level of $80. Saudi Arabia requires a level of $90 to achieve break-even with their annual budgets, while the rest of OPEC member states need more than $100 per barrel. The production cost of one barrel falls below $10 per barrel for most of the oil-producing countries in the Arabian Gulf region.
The average cost of shale oil is less than $45, but it is still delivering dividends and returns to its shareholders at a shorter time compared to conventional oils which takes more than five years to get some returns. It is estimated that demand for oil will peak in the coming 15 years, despite the fact that people are switching to electric cars, cleaner fuels and solar energy, which will have an impact.
However, oil will continue to remain a major factor for a long time to come. So, why not wait and let shale oil run its course, while OPEC stays behind to avoid further bad publicity? Today, OPEC is the sole culprit for the higher oil prices. The current US president is trying to keep the oil prices below $70, as any level above it will trigger Trump to take necessary action to push the oil prices down promptly.
If OPEC continues with its current production level, it will avoid any interferences from oil consumers and blames, and will let the oil market do its own calculations and magic, as the current oil pieces are not sustainable for the organization and it has to find another alternative, while focusing its efforts on maximizing its returns from oil by investing instead of just selling crude oil and petroleum products, and seeking further and deeper cracking into petrochemicals. If OPEC with its investments cannot get its desired and must price to meet its budgeted number to balance its economy, then keep oil in the ground and not above it until the right time comes.
By Kamel Al-Harami Independent Oil Analyst