A Bearish Oil Market Leaves OPEC at Uncertain Crossroads

Crude oil prices are currently hovering on $ 42 per barrel, on track for their worst first-half show since 1997​. TechSci explores one of the major reasons for this decline: the burgeoning shale oil industry

The oil market has slowly but decidedly been turning bearish for quite some time now. Since the steady highs of $105 per barrel (bbl) not 3 years back, and not to mention oil almost touching $145 bbl in July 2008, oil is trading currently at the $42 bbl level, sending OPEC into panic mode. Experts at TechSci weigh in on the argument and offer their insights:

Shale oil is perhaps the biggest reason being cited, in the race to the bottom for oil prices. Shale technology has been nothing new, and in fact, shale oil production peaked in the 1980’s, when around 45 million tonnes of shale was produced (to put this in perspective, current production is about 30 million tonnes); after the 1973 oil crisis when OPEC ‘embargoed’ several Western countries, said countries found it incumbent to develop some modicum of energy independence, given the growing political and economic clout of OPEC.

A recent estimate pegged the total global reserves of shale oil at 6.05 trillion barrels, with around 80% of it in the US. TechSci Research report “Middle East & Africa Oil & gas Pipeline Market By Application, By Type, Competition Forecast & Opportunities, 2012–2022” goes into a little more depth about the impact of shale in the MEA region. Technological innovation in shale and steeply declining capital costs have led the shale-boom, with some estimates suggesting that there has been a fall of 35%-40% in cost of drilling and completion of shale wells in FY16. Companies have become smart, achieving extraordinary gains in productivity by optimising production techniques and drilling only in ‘sweet spots’ that generate the most oil. Shale wells need not work continuously. Operations can shut down and restart without much pain, unlike oilfields which simply are not that easy to operate. OPEC tried to squeeze shale oil by boosting oil production; the bottom dropped out of the oil market but shale producers simply sat back and bided their time. Once the unreasonable production ceased and oil prices rebounded, shale production started once again.

What makes matters more interesting is that OPEC itself has internal and external factors to deal with. Several countries such as Iran, which is just coming out of a US led sanction, wants to retain its current production level, as do Iraq, Libya and Nigeria. Then there is Russia, with its vast natural resources, where energy sanctions are being recommended by the US but virulently opposed by energy-hungry European countries, making for some very confusing geopolitics. The key problem, however, for OPEC and other producers is that oil has become zero-sum game; if production is hiked, shale leaves the market but conventional oil suffers higher market share at the cost of low oil prices and if production is cut, then prices will rise but this will further entice more shale producers, diluting OPEC and conventional oil’s market share.

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