OPEC forecast to further cut oil production to drive out low-cost US shale

The demand-supply imbalance in the oil and gas industry over the past couple of years has had far-reaching economic and geopolitical implications for the global market.

Strong production in the North American and Russian markets led to an oversupply, which triggered a price crash and economic instability in the euro zone, geopolitical tensions in the Middle East and Africa region, and low demand in Asia-Pacific.

Further, the low revenue inflow compelled oil and gas majors to cut back their capital expenditure (CAPEX) and oilfield services.

And as the oil rig count in the US almost doubled and the production from tight oil surged, some Organisation of Petroleum Exporting Countries (OPEC) members were compelled to decrease production to restore balance to the global production.

However, they may not be able to withhold production for an extended period as they have to produce enough oil to break even on production costs.

Similarly, if non-OPEC producers continue to increase production, there could be a double dip in global oil prices.

Mahesh Radhakrishnan, Energy Analyst at Frost & Sullivan, the market intelligence provider, commented: “The companies that will survive the unpredictable price fluctuations will be the ones that do not depend solely on the oil & gas industry for revenues.

“Oil companies that are vertically integrated will be ideally positioned to optimise their operations, as they will have a stable downstream business, which usually profits when oil prices are low. National oil companies with localised operations could focus on their mature fields and turn them into profitable wells.

“US access to innovative drilling technology is reducing the per-barrel cost of extraction in tight oil formations, which is allowing it to boost production even when oil prices are low. Other countries that do not have the technology know-how to tap their tight oil reserves need to seek collaboration opportunities.

“In countries where oil & gas production is responsible for more than 80% of the gross domestic product, low prices will result in a current account deficit. The worst hit segment will be oilfield services, as oil companies will pressure them to produce more for less.

“Even though oil prices started to increase toward the end of 2016 and early 2017, this situation is likely to reverse if more production cuts are not agreed upon by both OPEC and non-OPEC producers.

“A double dip in oil price can lead to further drop in investments, which could impair the economic ecosystem globally.”

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed