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Did OPEC Regain Full Control Of The Market?

By Faisal Faeq CommoditiesOct 12, 2021 02:15AM ET
www.investing.com/analysis/did-opec-regain-full-control-of-the-market-200604746
Did OPEC Regain Full Control Of The Market?
By Faisal Faeq   |  Oct 12, 2021 02:15AM ET
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Oil prices made their 5th weekly gains and rose to the highest levels since November 2014. Though both Brent and WTI surpassed the $80 per barrel mark since the beginning of October, OPEC+ decided to maintain its output strategy to increase output by 400,000 barrels per day (bpd), despite the growing signs that the market may need a larger hike to mitigate the global energy crunch, as demand picks up and winter nears.
 
It is not OPEC+'s decline to the demand increase that sent prices to new highs, but rather mostly the demand continuing to outpace supply by 1.2 million bpd in October and 900,000 b/d in November according to S&P Global Platts. OPEC+ elected to continue its cautious approach to monitor global markets' developments as producers have shown great agility to respond to market needs as supply/demand balance dictates.
 
Supply tightness and the continued draw on global oil inventories have been exacerbated by the decrease in US supplies. This is in addition to the substitution of some oil refined products to generate electricity as a result of the prolonged period of high energy prices caused by the lack of gas and coal supplies globally.
 
With WTI crude prices breaching the $80 per barrel mark for the first time since the end of 2014, US crude oil production would have been expected to jump beyond its pre-pandemic peak of 13 million bpd, and yet, it's still around 11.3 million bpd; oil price level should have enticed production growth.
 
OPEC+'s maintaining of its schedule to gradually up monthly production by 400,000 barrels per day every month until at least April 2022 to phase out 5.8 million bpd of existing cuts shouldn’t be triggering a surge in crude prices, despite the pressure faced to produce more to help lower prices as demand has recovered faster than expected in certain parts of the world.
 
Keeping to its output strategy shows that OPEC+ appears to be very much in control of the oil market. Even if the OPEC producers' market share wasn’t ever thought to be threatened by shale producers, OPEC+ producers have regained control of the market amid the disappearing influence of the marginal barrel producers.
 
Since 2012 onwards, US shale oil used to add nearly one million bpd annually, causing some disruptions in conventional supplies from western Africa. Back then, shale oil was considered marginal barrels that represented a tiny proportion of the global supplies and fit in the gap between supply and demand. However, when the deficit became larger in 2014, oil prices crashed from above $100 per barrel to the mid-$50s because shale barrels added more to the market in addition to OPEC output strategy back then.
 
As per the US Energy Information Administration (EIA), US shale oil output rose to 8.1 million bpd in September, the highest since April 2020. Hence, US shale should not be considered as a marginal barrel with this volume.
 
Moreover, US crude oil exports so far this year have averaged around 3 million bpd. Hence, US shale isn't short-cycled, but continues to impact global supply demand balance. This means that even if OPEC+ has regained control of the market after the pandemic outbreaks on oil demand, US shale oil is still massively needed to respond to oil demand growth, even if some still consider it as a marginal barrel.
Did OPEC Regain Full Control Of The Market?
 

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Did OPEC Regain Full Control Of The Market?

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