Understanding the nuances of the relationship between global crude oil price dynamics and international geopolitical conditions can be complicated—but is essential in looking at the future of the oil market and its ultimate bottom-line in shippers’ budgets. Recently, headlines pronounced that the US hit yet another historic milestone related to domestic crude oil production. For the last several years the US has drastically increased their crude oil production, however we do not operate in a vacuum. How does a high US production environment affect other key players globally, and what is the long term impact on prices of crude and refined products?
The Shale Boom’s Effect on Global Oil Supply
Only 15 years ago, US oil producers believed they extracted most of the total crude oil that they could access. Despite the common belief, a man named George Mitchell proved that our previous projections of US oil reserves were wrong. His development of what we refer to today as hydraulic fracturing, proved it is possible to drill into hard porous rock to extract more oil. To learn more about hydraulic fracturing refer to our blog, Beginner’s Guide to Upstream Economics in the Crude Oil Industry. The implementation of hydraulic fracturing incited a surge in oil production shortly after the US recovered from the 2008 recession. As the economy looked up, so did investment into oil production as a means of stimulating our struggling economy. Hydraulic fracturing soon became a common practice in oil fields across the US contributing to the rapid increase in US crude oil production we see today. In a short time, the US became one of the largest oil producers in the world. This rise in energy dominance is known as the shale boom.
The US shale, or tight oil, boom continues to flourish. Active oil rigs surged from 183 in 2009 to 1,595 in 2014 to kickstart the oil production boom. Today, around 860 rigs are active. From 2012 to the end of 2017, US crude oil production rose from roughly 6 million barrels per day (mmbd) to over 10 mmbd. So far in 2018, US crude oil production rose to the 11 mmbd and the Energy Information Agency (EIA) expects US crude production to surpass 12 mmbd in the second half of 2019. Below is a chart showing US oil production over the past six years.
OPEC Supply Cuts Influencing Global Supply
Global crude oil supply is essentially made up of three overarching entities—US, Russia, and a cartel made up of fifteen countries called the Organization of Petroleum Exporting Countries (OPEC). The three entities make up over 50 percent of the total global crude production. OPEC’s goal is to stabilize oil prices and control oil supply in the marketplace. At the end of 2016, OPEC and supporting countries, including Russia, decided to cut production to decrease the global supply of crude oil. When there is less supply in the market, prices will rise. The cartel controls production based on the supply from the rest of the world and global demand for crude oil, aiming to find a balance that meets the supply-demand equilibrium. Saudi Arabia, OPEC’s de facto leader and largest oil producer, is comfortable with a Brent crude benchmark price of $80 per barrel (bbl). Though the cartel saw success in cutting supply close to equilibrium which pushed prices upward, they continue to experience unexpected outages that threaten to push supply of crude oil lower.
For example, Venezuela’s oil production continues to decrease at a rapid rate as their economic crisis remains dire. Iran, the third largest oil producer in OPEC, sees crude exports dropping by a third since the US applied sanctions after pulling out of the Iranian nuclear accord on May 8th. Full Iranian sanctions will go into effect in November 2018. Most recently, Libya is dealing with political unrest, inciting attacks on energy infrastructure and ports. In June and July of 2018, Libya saw outages of crude production and exports nearing 800,000 bpd as they lost control of their eastern ports. Libya’s crude production is back online as of September, however ongoing attacks from rebel groups persist, making it a continuous threat on their oil output.
These outages of crude production have caused OPEC and supporting countries to exceed their production cut quota for the past year shown in the chart below.
While OPEC’s target quota has still not been achieved, booming US production takes up the lacking market share to balance out and cover the original production cuts and outages some OPEC countries are experiencing. The US is a free market, so the government does not control the amount of crude oil being produced. As the financial returns continue to look attractive, it is expected that US crude producers will continue to increase investment to output more crude into the market. According to the International Energy Agency (IEA) oil market report, global crude oil supply in August 2018 reached a record 100 mmbd. This indicates OPEC countries such as Saudi Arabia and Iraq, and surging US production is supporting the outages from Iran and Venezuela.
As with any global market, supply and demand will ebb and flow with market conditions, geopolitical events, and other external factors. In the current market, exceedingly strong global demand keeps the global supply-demand balance steady, however these conditions will not last in perpetuity. Effects of a high US production environment remain to be seen as OPEC relations evolve and outages fluctuate.
The Applied Knowledge Team keeps a close eye on the global crude oil market. For questions or information about crude oil, diesel prices, or geopolitical event—contact us!