Many are wondering why both the US and the Organization of the Petroleum Exporting Countries (OPEC) are producing so much oil although the demand is not in equilibrium with the supply.
There are many reasons to explain why both are still producing record amounts of oil with a lower demand in the market. Some of the reasons are related to economics, policy, money and mostly for bragging rights, better known as “market share.” Well, it seems that OPEC will win the bragging rights title, but the war for market share is still being fought.
US drillers have been the fuel to ignite the fire under OPEC. It has taken the top spot as the biggest oil and natural gas producer in the world, ousting Russia for the crown as a result of the shale boom. The increase in oil output last year helped the US overtake Saudi Arabia as a crude producer, making it the first time a country has raised production by at least 1 million bpd for three consecutive years, according to BP.
In May Reuters reported OPEC produced 31.22 million barrels of oil per day (bpd), a two-and-a-half year high. Unlike the US drillers who are cutting back, the cartel adopted a new strategy last November in favor of market share over prices. OPEC’s current output target is to maintain more than 30 million bpd.
The US has slowed its drilling down tremendously during the supply glut with rig count dropping every week since January according to Baker Hughes (NYSE:BHI) weekly rig count publications.
But OPEC has seemed to not care about the amount of oil it pumps into the market because they are constantly trying to increase their output. So why not cut back if you are OPEC until the market stabilizes?
I think the real question is how did we get to this point? Well, with new fracking technologies and bans being lifted in the US, many oil service providers started drilling domestically because of less risk with the uncertainty in the Middle East. Additionally, the innovations made it more cost effective, and it would stimulate the economy by putting hundreds of thousands of Americans to work. China, the world’s biggest oil importer, was growing so fast that exporters couldn’t keep up with the demand. Now that China has cut back on the amount of oil it buys, exporters are sitting on oil waiting for another growing economy to come calling.
Prior to the market saturation, oil hit record highs last July with WTI trading over $100 a barrel. This had every oil service provider both domestically and globally paying attention to the US shale oil boom.Fracking was the latest craze and helped stimulate the US economy exponentially. Since then, crude oil prices had spiral downward to five-year lows and bottomed out in February at $44 a barrel. As a result, companies started losing money based on capital expenditures that were budgeted according to higher crude prices. Furthermore, layoffs started happening to save money, causing more than 150,000 US oil industry workers to become unemployed.
The downturn in the US didn’t have as big of an impact as the oil crisis back in the 1980’s because unlike then, the dollar remained strong. The rest of the economy is still flourishing and better than ever, causing many analysts to forecast a short-term strain on the oil industry.
Consumers, logistics companies, and airlines are the major winners during this slump. The price of gasoline has been its lowest in years. In January, Delta Airlines (NYSE: DAL) reported to the Wall Street Journal it may save more than $2 billion in 2015 as a result of lower fuel prices. With a plentiful oil supply consumers are embracing the price at the pump and spending more money elsewhere, constantly stimulating the US economy.
On Tuesday,WTI was $60.38 per barrel at the close of trading. A good sign for the precious commodity that’s rebounding from its worst fall since the 1980’s.
Article written by HEI contributor Shon Mattox.