A new global energy order is emerging on the horizon.

The Organisation of the Petroleum Exporting Countries (Opec) is no longer the sole player on the global energy chess board. Russia and the US shale are equal stake-holders in this emerging global energy order.

Opec’s overall compliance with output cuts has gone up in February to 94 per cent, from 86pc in January. This is unprecedented in many ways. Yet, crude oil markets continue to feel the heat.

Mid last week, oil closed at the lowest level since November, after data showed US crude inventories rising faster than expected. Futures dropped 1.8pc in New York. The Brent followed, touching below $50 a barrel on Wednesday, for the first time this year.

According to a report of the Energy Information Energy, the US crude inventories rose by 5 million barrels to a record high of 533.1 million barrels in the week ending March 17. The rise in US crude stocks comes as shale drillers ramp up efforts, once the rebound in prices, due to the Opec output cut, relieved the pressure on their balance sheets, which had been hard hit by the two-year slump. US drillers have added rigs for nine straight weeks.

This all is heaping pressure on Opec. It is faced with a dilemma. In order to control the markets, Opec will have to do more, by either increasing the output cuts or rolling it over the initial six-month cut period, analysts are now underlining. For the moment, markets appear sceptical.

“There are growing doubts among market participants about whether the Opec production cuts will be able to quickly restore balance on the oil market,” Carsten Fritsch at Commerzbank was reported as saying. “[The cuts are] still failing to drive down stocks.”

US bank Jefferies underlined in a note: “Opec’s market intervention has not yet resulted in significant visible inventory drawdowns, and the financial markets have lost patience.”

Increasing shale output is blunting the Opec moves to a great extent. And the pessimism is not only short term but seems to extend beyond. New production projects and a fresh shale boom could boost oil output by a million bpd, year-on-year, and result in an oversupply over the next couple of years, Goldman Sachs reported.

“2017-19 is likely to see the largest increase in mega projects’ production in history, as the record 2011-13 capex commitment yields fruit,” the US investment bank said in a research note last Tuesday. The delayed delivery of the 2011-13 capex boom could lead to record non-Opec production growth in 2018, it added.

Opec’s output cut decision has unintentionally helped the shale producers, the bank said. In the emerging, New Oil Order, Goldman points out that Opec’s role has structurally changed from long-term price setter to inventory manager.

Goldman says, in the past, large-scale developments required seven years plus from Final Investment Decision to peak production, giving Opec long-term control over oil prices. However, US shale oil currently offers large-scale development opportunities with 6-9 months to peak production.

This short-cycle opportunity has structurally changed the cost dynamics, eliminating the need for high-cost frontier developments and instigating a competition for capital amongst oil producing countries. It is lowering and flattening the cost curve through improved contract terms and taxes.

Major stake-holders also don’t appear optimistic. Policymakers in Moscow were reported as saying on Friday that they see Urals at an average of $50 a barrel this year, falling to $40 at end-2017 and then staying near that level in 2018-19. Ural blends generally trade at little below the Brent.

Despite the fact that while opting for the output cut agreement last November, many within the Opec gave up the market share battle, at least for the time being. Yet, with the changing scenario, the markets share battle seems looming over the global energy horizon once again.

It also brings to fore another issue – that of market control. Who really controls the market? In the changed circumstances, to what extent Opec alone can influence the markets?

The answer to the question is bound to influence the global energy geo-politics too. Opec does not control and influence the markets alone. The growing shale output is impacting the global energy order in a considerable way. Besides Russia, US is now a major stake-holder in the emerging scenario.

In any calculation, Opec now needs to take that into account. Till yet, it has refrained from it. But Opec cannot continue overlooking the US any further.

Published in Dawn, March 26th, 2017