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OPEC Faces Declining Demand

Written By Jason Stutman

Posted May 30, 2013

There is a growing rift in OPEC, and the U.S. shale boom is playing a significant role.

OPEC logoThanks to continued investment and bountiful resources, shale oil production in the United States has skyrocketed over the past several years, and prices have fallen as a result.

Once in the driver’s seat of oil pricing, OPEC is starting to see the effects of shale production and is beginning to lose influence over the global market.

As I write this, West Texas Intermediate (WTI) is selling at $93 per barrel, while the OPEC basket is selling at $101. This is a fairly significant difference.

On top of this, OPEC nations are facing decreased demand from Western nations due to the massive increase in shale oil production in the U.S.

Two Sides of OPEC

OPEC will meet in the Austrian capital Friday to discuss its production policy – and the increase in U.S. shale production has essentially split OPEC into two groups.

The first group is represented by Saudi Arabia and Gulf states such as Iraq. These nations are seeing minimal direct effects from U.S. shale production increases. They have better budgets than some of the others, and they are still able to produce oil while making a profit, regardless of current WTI prices.

The second group is represented by various African nations, Iran, and Venezuela. These nations are experiencing a direct impact from the U.S. shale boom. They have lower budgets and rely on higher prices in order to make a profit.

But with record-breaking production coming out of shale plays like the Bakken and Eagle Ford, these higher prices have become unsustainable for a few OPEC members.

A good example is what’s happening in Nigeria. Nigeria is seeing the effects of the U.S. shale boom first hand. In the past, the country has earned profits exporting much of its crude to East Coast refineries in the U.S. for about $100 a barrel. However, these East Coast refineries are now receiving WTI by rail at a far cheaper rate, sharply driving down demand for Nigerian-produced crude.

Along with Nigeria, Iran and Venezuela have openly expressed the desire to curb oil production below the current ceiling in order to increase prices, but the Saudis and Iraqis see little reason to do so.

An Unbalanced Game

When it comes down to it, it’s unlikely there is going to be any major changes in production from OPEC right now. The Saudis still hold all the cards, and they have expressed no intentions to lower the production ceiling.

The ceiling is expected to remain at 30 millions barrels per day according to most analysts – a pretty safe bet when examining the positions of Saudi Arabia and Iraq, the two largest oil producers of OPEC.

Saudi oil minister Aku an-Naimi stated on Tuesday that the “international oil market is stable and balanced”. He also described the level of current prices as “suitable for producing and consuming nations,” indicating no intention to disrupt the market through a change in production goals.

Saudi Arabia has previously curbed production in order to remain close to the current 30 million bpd target but not to drop below it. It is clear that OPEC’s most influential player wants to keep prices right where they are, at about $100 per barrel.

Iraq, the second largest producer of OPEC oil, hasn’t shown signs of lowering production below the current ceiling either.

While Iraqi Oil Minister Abdulkarim al-Luaybi admits that the increase in shale oil production in the U.S. has had some impact on oil production and exports, he dismissed the issue as a non-concern.

Luaybi argued that curbing production would increase prices and hurt the “fragile global economy”. He cited the importance of price stability and not shocking the market.

Ironically enough, Iraq actually plans to boost oil production by pumping crude from two of its largest oil fields. Increased yield will begin in Manjoon, followed by Gharraf and West Qurna. The additional production is expected to raise capacity by 400 thousand barrels a day – a yield large enough to lower market prices.

And though we are unlikely to witness a change in the production ceiling on Friday, the future of OPEC remains uncertain due to the growing rift between participating nations.

As Iraq continues to increase production, and as U.S. shale oil continues to flood the market, nations like Nigeria and Venezuela are going to become less and less content with their current roles in OPEC.


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