Last week was bad news for OPEC from all angles. Nothing seemed to go right for the oil organization, as oil prices fell by more than $8 per barrel despite OPEC’s full adherence to daily productions cuts of 1.8 million barrels.
USA is bound to become the top leader in crude oil production next year, surpassing and overtaking Russia, which has already overtaken Saudi Arabia to become the second highest producer with production rate of more than 10.2 million barrels.
This is because of the increasing production of shale oil and the moves made by its producers to cut costs and manage to produce oil at a price of $44 per barrel.
It seems apparent that shale oil can exceed the production level without any problem while reducing cuts and operating more efficiently with lesser number of people.
To add to this, shale oil can cover any increase in demand for oil at any level between 1.3 to 1.5 percent of annual growth, leaving no room for conventional oil to benefit. This leaves OPEC empty handed, and will cause it to lose market share on a daily basis with its oil production cuts.
OPEC is not able to reduce and manage the surplus oil in the market and ensure a normal balanced level. The current production cuts of 1.8 million barrels per day are just not enough. The expected time for the surplus oil in the market to be balanced again is being extended on a daily basis. Now the organization claims that it could happen in June this year, even though there are no signs that this could happen.
All this was followed by the announcement of Norway concerning its serious intention to exit the oil market. The decision to sell all its relevant investments, stocks and funds, which are worth more than $35 billion, was reached last year by the country with the biggest sovereign wealth fund in the world, worth $1.1 trillion.
Hence, OPEC is facing some real challenges from every angle. It does not know how to stabilize the oil prices, at least as a reward for its oil cuts, and bring the barrel price to an acceptable rate of $60 a barrel. This level is perhaps a good and acceptable level for now. However, it is not sustainable if shale oil producers further increase their volume, as it will force OPEC to give higher discounts or face non-agreement for extending the current production cuts, even though it seems Saudi Arabia might reduce further cuts.
Again, OPEC countries should push for the same or follow the example of Norway by moving away from oil and finding another source of income.
In the meantime, OPEC must think about how it can cut costs at the state level, reduce annual expenses, cut down on subsidies and perhaps gradually introduce taxation. It has to think on a long-term basis, as working on short-term basis or compromises will not work anymore. Short-term solutions are no longer an open-ended option.
By Kamel Al-Harami – Independent Oil Analyst