Pull it together

February 19, 2016 08:54 AM

As the Energy Information Administration reports that U.S. crude supply hits the highest level in 88 years, OPEC is still trying to get its act together. Iraq is hinting they are on board with freezing output and is dropping hints there may be an “emergency" OPEC meeting in March. If OPEC and non-OPEC members can get their act together and freeze or cut production, it will take some uncertainty out of the market.

Uncertainty in the oil market has led to uncertainty in global markets so stability in the oil price might actually improve demand prospects. While Saudi Arabia has been winning the battle for oil market share, they may actually loose the war. The Saudis have been able to secure more market share but it has been a hollow victory. While the Saudis are saying they won’t cut production, they may change their mind as their spending on wars and domestic obligations may force some cooperation. Saudi Arabia's crude oil exports in December 2015 decreased by 3 % in comparison with November and amounted to almost 7.5 million barrels per day according to official Saudi statistics. But over the year, Saudi Arabia raised crude exports that averaged 7.39 million barrels a day last year, 4 % higher than 7.11 million barrels a day a year earlier, according to data compiled by Bloomberg.

This has come at the expense of U.S. shale oil. While shale has hung in there, it is starting to collapse as low prices and spending cuts caps their outlook They pointed out that, "even after oil prices began falling in June 2014, U.S. production (including condensates) continued to increase by another 1 million barrels per day (bpd). Between June 2014 and its peak in April 2015, oil output rose from an estimated 8.7 million bpd to 9.7 million bpd, according to the U.S. Energy Information Administration. Since April 2015, production has fallen, but it was still running at 9.3 million bpd in November 2015, the latest month for which reasonably comprehensive estimates are available. How much progress this represents depends on the baseline against which it is measured. In absolute terms, output has fallen by around 375,000 bpd between the peak in April 2015 and November 2015. If output had continued to increase on its pre-June 2014 trend, it would have been running at almost 11 million bpd by November 2015. The reduction compared to the pre-June 2014 trend is around 1.6 million bpd, which is one measure of how far the strategy has worked."

The EIA was more cautious about the outlook for U.S. oil output. In June, 2014 the agency predicted oil output would be running at 9.5 million bpd in November 2015. The price war has reduced production by around 150,000 bpd compared with this more conservative baseline. So the impact of the price war on U.S. shale output could be estimated at anything between 150,000 bpd and 1.6 million bpd.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.