OPEC countries last month cut oil production and this sparked a rally in crude prices. Saudi Arabia carries the impression that shale producers from the US, whom the Saudis call “high-cost producers” will be driven out of the market if OPEC maintains a low price and floods the market with more crude. This expectation has failed to materialize. US based shale producers have adopted much greater efficiency in shale production and this has resulted in much lower production costs. Shale producers are upbeat that they will win the battle for greater market share of crude.
Saudis are aware that the increase in oil prices may be short lived and they are going ahead with the expansion of Saudi economy into other sectors such as mining and technology. They raised $17.5 billion on a Bond issue October. They are going ahead with an IPO for the Saudi Arabian Oil Company due in 2018 and they expect that a mere 5% will fetch them $100 Billion.
As it stands today, shale producers have reduced from 9.6 million barrels a day in 2015 to 8.6 billion barrels today. OPEC production which had fallen to 40% of the market in 2014 has now risen to 42% of the market today. However, major OPEC producers have pledged output cut for only 6 months. What will happen after this, particularly if prices do not go up as projected, is anybody’s guess?
What is the take home message for us?
It is simple. Oil prices will not go up more than the current levels. Whatever OPEC does to raise the prices, shale producers will take advantage of the price hike and bring the prices down.
Not a bad news going into 2017.
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