The dip in oil prices to below $49 per barrel last Friday should not go unnoticed. Some real challenging questions were raised concerning the reason behind this sudden dip; whether the increase in shale oil production is the main factor along with increase in the number of oil rigs in the USA.
Of course, there are many factors that lead to such sudden decrease in barrel price. There is hesitation among OPEC members whether or not to continue with the current production cuts and if Russia will join the oil organization for a further 6-month extension in production cuts.
Despite assurances from all OPEC members to go ahead with the production cuts, there have been delays and the wait for specific meeting has led to some uncertainties. The other factor that has contributed to the speculation is that neither OPEC nor Russia has reduced total production by the agreed amount of 1.8 million barrels.
There is no doubt that the oil prices have been stable since November last year, staying within the range of $50-$55 per barrel without any disruption, and with every producer fully adhering to the production cuts. However, shale oil industry gradually but smartly began growing and the number of oil rigs has been increasing at the expense of OPEC’s decision, which had led to a stable level of oil prices that satisfied its shareholders and most importantly, the financial houses and banks.
With the stable oil prices, bankers have been welcoming shale oil investors. Financial houses set the ceiling of oil price at a high range of $40, and blessed the investors with their monies. Thus, shale oil producers went on to invest more in rigs, knowing that OPEC will protect them with its commitment for present and future cuts and knowing that any determination of oil prices will hurt the conventional oil producers too.
Maintaining a stable oil price is now hurting OPEC and working against its fundamental policy of keeping the prices stable for a long time. However, shale oil is taking advantage of this situation and growing at a fast rate with its backs protected by OPEC’s production-cut policy. Shale oil now represents more than 54 percent of the total USA crude oil production, which recently hit a maximum of 9.5 million barrels.
OPEC is now faced with a new challenge. It has no choice but to go ahead with the extension of its productions cuts along with Russia. If the market is in need of more production cuts until the end of the year, let’s do it with an additional 200,000 barrels per day in order to eliminate the high surplus of oil for the time being. It could seem self-defeating for short time but it will be accomplish its main objective of drying up the high inventory.
By Kamel Al-Harami
Independent Oil Analyst