OPEC appears to be winning the war against U.S. shale-oil producers, as low oil prices make higher cost operations unprofitable amid rising oil output.
In its closely watched monthly report, OPEC said it expects U.S. production to decelerate this year even as demand ticks higher.
Lower-than-expected output from U.S. producers led OPEC to cut its projection for non-OPEC supply in 2015 by about 72,000 barrels a day.
At the same time, OPEC raised its forecast for crude demand by about 400,000 barrels this year.
Taken together, the data suggest that OPEC’s strategy of strangling high-cost shale-oil drillers is working.
It used to be that OPEC was able to move the price of oil by increasing or cutting supply. After all, the 12 member nations produce about a third of the world’s supply of crude oil. When oil prices slipped, OPEC simply cut oil output.
This time around, OPEC took a different tack.
Oil prices are down about 60% over the last year-and-change and OPEC has done nothing but pump more. The idea is to defend its market share and put U.S. shale drillers out of business.
The shale industry responded by cutting costs, and greater efficiency did indeed look like it would stymie OPEC’s efforts.
Not anymore. If OPEC’s projections are accurate, the rout in oil prices is finally catching up to U.S. oil output. As OPEC said in its report:
“U.S. oil production has shown signs of slowing. This could contribute to a reduction in the imbalance of oil market fundamentals, however, it remains to be seen to what extent this can be achieved in the months to come.”
No Sign of Higher Oil Prices Soon
OPEC expects oil prices to increase eventually, but it has no idea when that will happen. Sure, OPEC’s price war against smaller shale-oil drillers is going according to plan, but the slowdown in U.S. production won’t be enough to lift prices anytime soon.
The world is awash in production and oil in storage, for one thing. And the coming end of sanctions against Iran will allow it to become a force on the global market once again.
True, demand among the world’s richer nations is growing at a better-than-expected pace, but that’s largely a function of cheap oil prices. As such, any rise in oil prices could be self-defeating if consumers only respond by curbing demand.
OPEC’s forecasts don’t spell doom for U.S. oil output, but they do suggest that the good times are over. Indeed, OPEC said as much:
“In North America there are signs that US production has started to respond to reduced investment and activity. Indeed, all eyes are on how quickly US production falls.”
It was fun while it lasted. Analysts have been predicting the end of the shale-oil boom for some time now. It appears that they’ve been proven right at last.
