Oil slide continues

Saudi Arabia is considering cutting oil exports by another 1 million barrels a day. Look at the oil price movement following this news, and you would think it is fake news. Such is the bearish sentiment in the oil market that news of such magnitude, in a market which has historically swung on speculations, failed to bring any upside to the international oil prices.

It was expected that a rebound in China’s GDP would be a catalyst to the oil market – but that did not happen either. The oil prices showed little to no response to a higher-than-expected GDP reported by China. Opec alone was never going to cut the deal, despite having more members on board and despite an unexpected strong compliance from all members.

The fact of the matter remains that it is the US shale players who matter the most. And they have been coming with relentless production. Last month saw a first time ever double digit month-on month growth in shale production. They have surely found ways to remain competitive at even under $50/bbl, and that is surely a worry for the conventional market.

The US EIA has also lowered its price forecast for 2018 and 2019 by 10 and 12 percent respectively. Market balance is far off from the current situation. Should the likes of Libya and Nigeria continue to pump in more oil, Opec’s already loose grip will be further eroded. Both these country were exempted from the Opec production cut deal and have taken good advantage of it, which may create some ripples amongst smaller contributing Opec members.

Opec has continued to price itself out of the market by keeping prices high enough to make production profitable for shale companies, and is also losing considerable market share to shale, and that too, swiftly. Goldman Sachs in its recent report has shown that slowing down of US rig count will not happen till oil goes under $40/bbl.

In longer term, things look even bleaker, as oil and coal are continuously losing shares as sources of energy. The evolution in the transportation sector is happening right now, and in another ten years, oil demand for transportation sector could be cut by a half. The cost of solar panels and EV is fast coming down, and China is embracing it faster than anyone else. The demand would never be the same again. And it increasingly appears that Opec may never be the same again either.