COURTESY the output cut by the Organisation of the Petroleum Exporting Countries (Opec) majors along with the non-Opec heavyweight Russia, crude markets have somewhat tightened.

Yet, despite declining inventories, prices continue to hover around $50 a barrel.

Why? What does this mean? Is the world “at the onset of the biggest disruption in oil markets ever?” Have the oil markets slipped out of the Opec hands?

Indeed so, if the available indications are to be taken seriously!

US shale will prevail over Opec, Citigroup is now insisting. The resilience of the US output is proving too much for Opec. Its strategy has backfired, resulting in revenue losses and dwindling market share, the bank analysts are now underlining.

Citigroup’s head of commodity research, Ed Morse, told Bloomberg in an interview that Opec and its partners cannot sustain their current strategy over a longer term, while shale producers have adapted to low prices and can break even at as low as $40 a barrel.

“In the end, the markets are going to win, and it’s going to be shale. If we’re in a $40 to $45 world, we’ll have enough drilling to add to the surplus in the world as a whole,” Morse said.

In the wake of these developments, Citi now sees US crude likely trading in a range of $40 to $60 over the next five years, down from its prior view of $40 to $65. Resultantly, Citi’s commodities research team has tempered its outlook. Only a few months back in February, the bank had projected that US crude prices would likely trade mostly in a range of $40 to $65 from 2017 to 2022. It now sees WTI trading at $40 to $55 a barrel in the 2018 to 2020 period and then $50 to $60 through 2022.

Citi notes that the oil market has experienced a high level of disruptions in recent years. Prices could indeed spike above $70 a barrel if recently restored production in places such as Nigeria and Libya falls again. But it could also sink below $40 if disruptions elsewhere in the world get resolved, putting more crude oil into the market, the bank insists.

Citi analysts now feel the robust US shale productivity and an improved outlook for projects in Mexico, Guyana, Brazil, and Canada can keep the market balanced and prices capped around $60 through 2022. The bank believes there is room for about 1.5 million barrels a day of growth through 2020 from US shale fields, where drillers use advanced methods to free oil and gas from rock formations.

Thus, despite Opec efforts, pressure on oil prices seems set to remain until at least 2020, as the US crude production is approaching all time high levels. The US crude production has jumped around 13 per cent over the past year alone, to over 9.5m bpd last week, its highest level since July 2015.

And there appears to be no stopping, as producers become more efficient. Oil output from major US shale plays is poised to reach a fresh record next month, further complicating Opec’s efforts to support prices.

The gain in the US output is being led by the Permian basin of Texas and New Mexico, where production has risen steadily over the past two years. The latest US Energy Information Administration (EIA) projections point to the country’s production rising comfortably above 10m bpd.

The EIA is now projecting the Permian shale output to rise by 64,000 barrels in September, reaching a record of 2.6m bpd.

EIA also underlined in its report that output from the Eagle Ford and Bakken regions is also expected to rise in September, with the former projected to produce 1.39m bpd and the latter 1.05m bpd. Output in the EIA’s newly included Anadarko region – comprising of 24 counties in Oklahoma and five in Texas – is poised to reach 459,000 bpd.

The conclusion remains clear. Despite some market tightening, the Opec strategy is not working.

Riyadh is no more the swing producer of the world. The US shale producers are the new swing producers. They seem to carry greater influence on the oil markets than Riyadh or Moscow.

With Aramco IPO just round the corner and the Saudi and Russian cash requirements continuing to grow, this all does not paint a rosy picture for them.

Opec’s influence on oil markets stands diminished – to say the least.

Published in Dawn, August 20th, 2017