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Tuesday , December 11 2018

Shale producers emerge as market stabilizing element

Oil prices to remain stable blow $50

Almost one year ago in November 2014, Saudi Arabia relinquished its role of swing producer and oil prices dropped by more than 50 percent. It now appears that the shale oil producers are emerging as the new legitimate replacement of Saudi Arabia as the oil market stabilizing element.

This means the oil prices will remain stable at a level below $50 per barrel. It could also mean that any increase in the oil prices beyond this level will indicate the return of the shale oil producers in the market or that the oil market has reached a level below which the oil prices will not drop, provided there is no additional supply of oil entering the market.

We are not sure if this will be the case but we are certain that OPEC did manage to tame the shale oil producers from going further and continuing to increase its production at the expense of the OPEC market share. Another certain aspect is that the oil price is currently stable at around $47-$49 per barrel.

Regarding whether the oil industry and oil producers are satisfied with this low level or not is a different matter but it seems the magic number to conquer shale oil producers has been achieved.

The next step is for the global oil demand to pick up, the oil glut of more than 3 million barrels to disappear and to wait for the reaction of the oil market regarding the arrival of new Iranian oil in the market.

For sure, the oil market will remain weak well into next year. It has to wait for the global economy particularly the economies of China, India and other emerging Asian markets to kick off the dust and move forward. Will those countries start growing at any level beyond single to double-digit figures? This is required for speeding up the increase in demand for oil, as investments in oil discovery are very minimal due to low investments of below $1.5 trillion globally.

The combined global revival and low oil investments are the main factors for oil prices to return to an acceptable level which will allow shale oil prices to re-emerge, in the absence of any agreement between oil producing countries globally.

For the time being, shale oil producers are stabilized at a low level, which is causing them to feel discomfort and want to either hide for some time or dig deeper into their pockets and figure out innovative ways to survive again; otherwise, shale oil producers can appear at a more acceptable, favorable and profitable level within two years. This is the advantage they have for beating conventional oil producers and bouncing back at any time.

Shale oil is no longer a mystery. In less than a year, its unknown hidden numbers will be exposed to everyone. For a year, we had one sole oil swing producer and now we have a rookie.

Email: naftikuwaiti@yahoo.com

By Kamel Al-Harami

Independent Oil Analyst

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