OPEC Set to Play the Waiting Game in Oil Market

(TIME) Following OPEC’s decision not to cut production at its June 5, 2015 meeting in Vienna, oil prices should likely continue their descent that began in early May. Prices may fall into the $50+ per barrel range since there is no tangible reason for their rise from January’s $46 low.

EIA
EIA and Labyrinth Consulting Services, Inc./Oilprice.com
Figure 1. Brent crude oil spot price May 1- June 1, 2015

Saudi Arabia’s longer view of demand and market share dominated the decision not to cut.

World oil production has undergone a structural shift from supply dominated by relatively inexpensive conventional production to increasingly more supply coming from expensive deep-water and unconventional production. Most conventional oil is located in the Arabian, Siberian and North Caspian basins (Figure 2) while deep-water and unconventional production is focused along the margins of the Atlantic Ocean and in North America.

UCGS/Oilprice.com Figure 2. Location map showing Arabian, Siberian and North Caspian sedimentary basins
UCGS/Oilprice.com
Figure 2. Location map showing Arabian, Siberian and North Caspian sedimentary basins.

This shift is at the root of the current price conflict between OPEC and North American oil producers. Since 2008, OPEC liquids production has been fairly flat until mid-2014 (Figure 3). Non-OPEC production outside of North America has been flat. Most production growth has occurred in the U.S. and Canada but it is not only from tight oil.

EIA and Labyrinth Consulting Services, Inc./Oilprice.comFigure 3. World liquids production since 2008 showing OPEC, non-OPEC minus the U.S. and Canada, and the U.S. and Canada
EIA and Labyrinth Consulting Services, Inc./Oilprice.com
Figure 3. World liquids production since 2008 showing OPEC, non-OPEC minus the U.S. and Canada, and the U.S. and Canada

The competition for OPEC market share is from Canadian oil sands, Gulf of Mexico deep-water and tight oil production. U.S. plus Canadian production has increased 6.2 million barrels per day (mmbpd) since January 2008. OPEC production has increased 2 mmbpd over that period with 1.3 mmbpd (65%) of that increase since June 2014.

Lower oil prices over the past year (Figure 4) have not yet resulted in any observable decrease in North American production. Higher prices over the last few months further complicate the situation for OPEC. The global production surplus has gotten worse, not better, in recent months but prices rose based on sentiment.

EIA and Labyrinth Consulting Services, Inc./Oilprice.com  Figure 4. Crude oil prices since June 2014
EIA and Labyrinth Consulting Services, Inc./Oilprice.com
Figure 4. Crude oil prices since June 2014

It is true that U.S. production may be falling but a 3-month lag in reporting prevents us from seeing this. It is also true that OPEC may have limited capacity to increase their production further although Middle East rig counts have never been higher.

The only way for OPEC to significantly increase its market share is to undermine North American expensive oil production with low oil prices for at least another 6 months. This is why a production cut at this time made little sense to them.

This article originally appeared on Oilprice.com.