OPEC's renewed challenge

The difficulty arises from the fact that for foreseeable future, or fo the next five years at least, OPEC will see that whatever demand prevails will be consumed by non-OPEC suppliers, which means eating eventually into its market share.

Moreover, and for the first time, a breakthrough in technology is presenting the conventional hydrocarbon supplier and the oil market final resort with its most daunting challenge so far.

The boom in shale oil production in the US, sand oil in Canada and deep water drilling in Brazil are providing the market with unconventional supplies that have already started impacting on OPEC supplies to the market. Even the mature oilfields in the North Sea are benefiting from this new trend and are expected to add new 260,000 barrels per day (bpd) in the coming three to four years.

The tricky point was and continues to be the impact of all that on prices. For the past period, OPEC was satisfied with a three digit price tag that has been holding for quite some time enabling the member countries to reap good income.
However, this month and according to the monthly OPEC Market Report its price basket composed of OPEC crudes declined in April and for the second consecutive month by $ 5.39 a barrel or more than 5 percent to average around $ 101.05 a barrel. Taken on yearly average, the bench-marker dropped by $ 10.22 a barrel, or 8.7 percent. If this trend continues, it will not be long before the basket drops below the psychological barrier of the three digit figure of $ 100 a barrel, with all its implications in terms of revenue for member countries.

The last forecast by the Paris-based International Energy Agency (IEA) released recently highlighted the growth of non-OPEC supplies that are expected to grow by 1.9 percent to 53.3 million bpd.

Over the coming five years, the United States alone will add 2.8 million bpd and that amounts to almost half of expected growth.

More significant is that the new figure is 420,000 bpd higher than IEA forecast last year, which refers to growth trend fueled mainly by the hydraulic fracturing technology that had successfully unleashed huge amounts of supplies that used to be trapped in rocks.

More importantly, the growth of US supplies will enable it increase domestic production to the extent that impacts its dependence on imported foreign oil. And by 2018 US domestic production is expected to top 11.9 million bpd and along that road it will overtake Russia, the biggest producer in five years period. Available information expects Russia to increase its production by 30,000 bpd only to 10.76 million bpd by 2018.

For more than half a century of its existence and particularly somehow as regulator of the market taking over that responsibility from the Seven Sisters, who inherited that role from Texas Rail Commission, OPEC has been shifting its strategy between defending its market share and defending its price target. It has been doing that at various degrees of success though it has moved away from the rigid performance thanks to bitter experiences of trying to defend an artificial price.

This time there are structural changes in terms of the new technology, which could be utilized by a big consumer like China that accounts for at least half of growth in demand or Russia, the world's top producer so far and enable it to hold that position.

To complicate things more, the flattening of demand and the call on OPEC supplies will result in increasing the spare capacity within the organization raising it to around 6.4 million bpd, or 6.6 percent of the global world oil demand. That in it could be problematic in terms of encouraging member countries pressed by their financial needs to go on cheating spree and pump more oil beyond their assigned quotas to compensate for the decline in revenues. That was a typical practice known in the past and is expected to flourish once member countries feel the pinch in their finances.
But on the other hand, these new developments could add to the security and stability of the market as there will be enough supplies to meet growing demand.

But the political instability in the Middle East will have its negative impact on expected supplies from some countries. Iran, for instance, is known to be subjected to Western sanctions that will limit its exports.
Iraq and Libya both with great potential suffer from political and security problems that impact their abilities to grow.
And with expanding uncertainty, the best option that remains for OPEC is to continue the policy of maintaining the status quo and leave it to big players such as Saudi Arabia to adjust to the market needs as it has been doing all along.

Email: asidahmed@hotmail.com

Source: ARAB NEWS