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The Oil War Is Only Just Getting Started

The Oil War Is Only Just Getting Started

by Tsvetana Paraskova for Oilprice.com

It’s been a month now that investors and analysts have been closely watching two main drivers for oil prices: how OPEC is doing with the supply-cut deal, and how US shale is responding to fifty-plus-dollar oil with rebounding drilling activity. Those two main factors are largely neutralizing each other, and are putting a floor and a cap to a price range of between $50 and $60.

The US rig count has been rising, while OPEC seems unfazed by the resurgence in North American shale activity and is trying to convince the market (and itself) and prove that it would be mostly adhering to the promise to curtail supply in an effort to boost prices and bring markets back to balance. In the next couple of months, official production figures will point to who's winning this round of the oil wars.

This would be the short-term game between low-cost producers and higher-cost producers.

In the longer run, the latest energy outlook by supermajor BP points to another looming battle for market share, where low-cost producers may try to boost market shares before oil demand peaks.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”.

“In a world where there’s an abundance of potential oil reserves and supply, what we may see is low-cost producers producing ever-increasing amounts of that oil and higher-cost producers getting gradually crowded out,” Spencer Dale, BP group chief economist said.

In BP’s definition of low-cost producers, the majority of the lowest-cost resources sit in large, conventional onshore oilfields, particularly in the Middle East and Russia.

Although this view that low-cost producers would try to seize more market share comes from an oil major with significant interests in Russia and Iraq, for example, BP may not be wrong in predicting that the abundance of oil resources would prompt the lowest-cost producers to pump the most out of low-cost barrels before the world starts to unwind from too much reliance on oil.

Oil demand growth is expected to slow down in the years to come. BP pegs the cumulative oil demand until 2035 at around 700 billion barrels, “significantly less than recoverable oil in the Middle East alone“.

Middle East OPEC production growth would account for all OPEC output growth by 2035, BP reckons, noting that other OPEC production typically has a higher cost base and its market share would drop.

The US liquids production is expected to rise by 4 million bpd to 19 million bpd by 2035, with growth mostly in the first half of the period, driven by tight oil and NGL output.

So, both OPEC’s Middle East members and the US are seen increasing oil and liquids production in the next two decades.

However, OPEC—especially Saudi Arabia—has the recent bitter experience of its pump-at-will policy for market share backfiring on its economy when oil prices crashed.

Another market-share war would involve too many unknowns, including supply-demand basics, leaner and meaner non-OPEC producers, oil price effects on oil-revenue-dependent economies, or rationale for investments in higher-cost areas.

OPEC’s decision to deliberately cut supply and abandon the strategy of pursuing market share at all costs is currently benefiting the cartel’s competitor, US shale.

Commenting on OPEC’s current and future relevance and influence on the oil markets, Wood Mackenzie said in an analysis last week:

The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel. If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.

Five or ten years from now, a possible market share ‘oil war’ would take place on a totally different battleground, and some regiments or battalions may lack essential armory to wage such war.

Tsvetana Paraskova is a writer for the US-based Divergente LLC consulting firm with more than a decade of experience writing for news outlets such as iNVEZZ and SeeNews.

Link to original article: http://oilprice.com/Energy/Crude-Oil/The-Oil-War-Is-Only-Just-Getting-Started.html

Comments

Dr. Strange Love

Duuhhh. The Erratic Potus is in command now. Why waste our time writing the obvious.

Marshall Taylor

There are so many organizations and ideas in this article that I look forward to failing - OPEC, BP, oil shale, the oil-corrupted parts of the Middle East, Russia, and the US. May EVs put them in the garbage can of history and good riddance.

SJC

Increased U.S. production and mileage has helped reduce imported oil. The Saudis saw this, it was not totally Iran and Russia they were targeting with $50 per barrel oil.

Account Deleted

The good thing is that the US can finally achieve oil independence because of increasingly cheap to produce shale oil and gas (and because of new cost reducing policies by the Trump administration) and when these shale fields are also being depleted then there is a new type of oil field called a 50Gwh per year battery factory. Each such factory could make 1 million small self-driving taxis each doing 100k miles per year saving 4000 gallons of oil per year (assuming 25mpg 4000=100,000/25) or 95 barrels of oil (95=4000/42). So 95 million barrels of oil saved per year. However, if these BEVs can last 10 years each 50 Gwh factory could maintain a fleet of 10 million driverless BEVs that will save the world from 950 million barrels of oil per year. So each 50Gwh battery factory can effectively be considered a 2.6 million barrels per day oil field (2.6=950/365). And this massive oil field will last forever and only cost 5 billion USD to build and I guess another 5 billion usd to maintain every 10 years.

I bet the Saudis don’t see that coming. Aside from much more Middle East war oil will have a hard time ever going over 60 usd a barrel and most oil producers need over 50 usd to make a profit producing oil so less than 50 usd per barrel is not possible either long-term.

SJC

I don't know about independent, but we can reduce our imports to just those from Canada and Mexico, no more OPEC nor Middle East.

HarveyD

At least 2 additional pipelines would be required to raise imports from Canada from 3.5 million barrels/day to 5.5 million barrels/day.

Not an ease taste to get approved!

Secondly, a cross Alaska pipeline would be required to move oil South from the Arctic Ocean.

SJC

Rump the Loon seems to like pipelines.

Dr. Strange Love

Rump's father sent him to the Wharton business school at the Uni of Penn. Hence, Rump's Cortex is only capable of figuring out how to use and manage capital in a safe and affective way. A pipeline is Easy to model for him. Don't expect too much.

Dr. Strange Love

Also, Rump likes projects that take up space. Buildings, Pipelines, Mexican Wall and so on. It's easy.

Trump putting us to sleep: "We will build the wall .... Build the wall .... We will build the pipeline .... Build the pipeline ...."

SJC

We used to import more than half with W when we used 20 million barrels per day in 2005. Now we use 16 million barrels per day and produce over 10 million of those.
If we can get our consumption down to say 14 million barrels per day and keep our production up, Canada and Mexico could supply the rest. The XL pipe will proceed, the North Dakota pipe will proceed, in site of the dangers of water contamination.

philmcneal

Yeah Canada can use a dollar boost, buy from us!

SJC

Canada is a good neighbor, could not ask for a better one :-)

HarveyD

Yes, Canada can supply cheap Oil @ 5+ million barrels/day for the next 50+ years if more pipelines are installed.

Eventually (progressively) excess pipelines could be converted to transport fresh water from Canada to USA and/or from New Orleans to LA?

SJC

After tar sands pipelines destroy our aquifers I guess the farmers will need lots of fresh water.

HarveyD

If the Alberta aquifers are affected after 50+ years of tar sands operation, new crops will have to be developed to grow with higher level of tar?

Cleaning up current and future residue ponds could be an essential alternative. Who would foot the bill? A extra Royalty of about $5/barrel could do it but producers would object?

SJC

I am more concerned with tar sands pipelines rupturing in rivers and lakes, it sinks and gets into ground water. The main aquifer in the central plains provides water to farms in SIX states.

HarveyD

The inherent quality of future pipelines and their installation should be improved to reduce leaks. Leak detectors with automatic valves could reduce the oil leaked on every event.

The above is possible but could cost an extra $1/barrel or about a mere extra 2 cents/gallon at the pump.

Safety and security (for environment and all living creatures) have a price? Secondly, it would create more good paying jobs.

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