As OPEC Infighting Continues, U.S. Becomes Energy Swing Producer - Global Trade Magazine
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  May 11th, 2016 | Written by

As OPEC Infighting Continues, U.S. Becomes Energy Swing Producer

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  • OPEC's infighting signals that American shale producers are increasingly in the driver's seat on world oil prices.
  • After OPEC’s April meeting, economists expected that the price of Brent oil would decline.
  • The uptick in oil prices is great news for domestic shale producers.

When OPEC members couldn’t agree at their April meeting to cap oil output in an effort to boost prices, did it signal the end of the cartel’s reign as the world’s energy swing producer—leaving the door open for American shale producers to take over the crown?

It’s a distinct possibility, according to Dan K. Eberhart, CEO of Canary, LLC, one of the largest private wellhead service company in North America, and an expert on U.S. and international energy policy.

For decades, OPEC has set the global price of oil by controlling supply. But with shale production cutting drastically into OPEC’s market share, the cartel’s dominance has been in decline.

Saudi Arabia, OPEC’s de facto leader, needs that market share for multiple reasons, Eberhart noted.

“First of all, Saudi Arabia is determined to fight off competition from the U.S. and other non-OPEC producers,” he said. “But if oil prices are down, then Saudi Arabia, which produces more oil than any other OPEC country, has to limit supply in order to bring prices back up. Maintaining market share is also fundamental if Saudi Arabia is to remain the cartel’s most influential force.”

But at the recent meeting in Doha, Qatar, it seemed that Iran wielded more power than anticipated.

Ahead of the session, OPEC-watchers were convinced that the cartel would freeze production in an effort to raise sagging oil prices. However, the group was unable to forge an agreement largely because Iran refused to even attend the meeting, much less roll back production.

In the months since the west lifted sanctions against Iran, effectively restoring its ability to export oil to world markets, the country has ramped up production to more than 3.1 million barrels per day. Saudi Arabia insisted that Iran cooperate with the proposed freeze. If Iran didn’t limit its output, then neither would the Saudi Arabia, Libya, Iraq, or Kuwait. When Iran was a no-show, the deal fell apart.

“OPEC’s infighting and failure to reach an accord signals that American shale producers are increasingly in the driver’s seat on world oil prices,” Eberhart explained. “Shale has passed OPEC in the outside lane.”

Immediately after the April meeting, the expectation by some Middle Eastern economists was that the price of Brent oil–the current international benchmark crude—would decline from $40 to about $35 per barrel. “But both Brent and West Texas Intermediate, the U.S. benchmark, are up,” said Eberhart. “In fact, Brent just topped $47 per barrel and WTI finished around $44 per barrel.”

The uptick in prices is great news for domestic shale producers, according to Eberhart. “They’ve become so efficient that break-even prices are down and production continues to increase, even with significantly fewer rigs,” he said. “As prices rise, they’ll be able to bring mothballed rigs back into business, continue to grow production, and keep eating into OPEC’s share.”

The fact that the oil high prices that made shale development economically viable in the first place were created by OPEC’s supply cuts isn’t wasted on Eberhart.

“It’s ironic that OPEC’s years of controlled production and high prices, coupled with American ingenuity, drove domestic shale development into high gear,” Eberhart said. “Today, we’re poised to take over as the world’s swing producer, and OPEC’s old policies contributed to our success.”