Saudi - v - Shale .......no contest, surely ?

Thursday 14th May 2015

Saudi  - v - Shale .......no contest, surely ?

"Shale-Oil Producers Ready to Raise Production", The Wall Street Journal Online.

  and

"Saudi Arabia sees success in fight to retain dominance of global oil", The Financial Times, p.1

It would be hard to overestimate the importance of the oil price to global economies and markets. Its precipitous fall and subsequent recovery, and the deflationary/inflationary implications, constituted  a substantial part of the rationale (if we could call it that) behind the corresponding surge and fall in bond prices. The effect of the oil price on the growth prospects for the economies of both producer and consumer nations needs little explanation. So, after a near 40% rebound in crude prices since March, where do we stand now in the battle for market share?

Saudi Arabia is happy that its decision to open the taps and keep them flowing has paid dividends. Tired of its obligation as the world's largest oil producer to adjust its output to maintain prices, Saudi determined to regain its share of the market by pricing out other higher-cost producers and in particular the relative newcomer, US shale-oil producers. The data certainly suggest that in that they have been successful.  The fall in price has meant that the number of shale-oil rigs still in production in the US has fallen by a massive 58%. But we know that numbers don't always tell the full story. Many of the closed rigs can be reactivated almost immediately should prices continue to rise. In addition, some of the largest US producers state that the efficiencies that they have forced to make by falling prices will enable them to open new rigs even if prices stay at current levels.

But why focus so heavily on shale-oil production ? After all, even at peak it contributed no more than 5% of global supply. The answer probably lies in the status of shale-oil producers as so-called "swing producers", able to boost production when prices are high and cut back when they fall. As such they are representative of the kind of threat to market-share that the Saudis and other OPEC members would wish to see sidelined.

So , the future for the oil price? Your guess is as good as mine. There is absolutely no shortage of supply and little sign of increased demand. Anecdotal evidence has it that there are plenty of cargoes afloat at sea still waiting for buyers. On the other hand, nothing is more sensitive than the oil price to geopolitical tensions in the Middle East, and we're unlikely to have any shortage of those either. One brave analyst, Tom Pugh of Capital Economics, has ventured a level of $60 for Brent Crude at year-end. It's as good as forecast as any I suppose, and just $6 lower than current levels. But even if he's right, expect lots of ups and downs between then and now. 

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