In a significant development that challenges oil bulls and OPEC‘s efforts to buoy benchmarks through deeper production cuts, the United States has reported record-breaking crude oil production. The Energy Information Administration (EIA) revealed last week that the average daily production in September held steady, remaining at the peak level of 13.24 million barrels reached in August. This occurred despite cost inflation and a decline in international oil prices, and U.S. shale drillers show no inclination to scale back their operations.
This scenario bears a resemblance to the oil industry’s state during 2014-2016, when prices plummeted by 70% due to a Saudi-led OPEC strategy aimed at undercutting U.S. shale by flooding the market. However, the current situation differs in crucial ways. U.S. producers have strengthened their positions, making them more resistant to price wars. Simultaneously, Saudi Arabia and its Gulf allies exhibit a heightened aversion to risks, likely influenced by the austerity measures imposed in response to the 2014 oil price crisis.
Some analysts propose that the only recourse for Saudi Arabia in the face of this challenge is to open the taps and attempt to suppress U.S. shale once more. However, this strategy, akin to a nuclear option, would inflict harm on Saudi Arabia and its OPEC counterparts. An alternative approach would be to persist with production cuts.
The market response to the latest production cut announcement was muted, as it was largely anticipated. Traders, many of whom are automated systems, would have required a substantial cut to be impressed. The current state of the oil market is distorted, with the connection between futures benchmark prices and physical supply and demand disrupted. Yet, over time, this link is expected to reestablish itself.
U.S. drillers have shifted away from the “Drill, baby, drill” mentality of the past, embracing discipline and caution in production growth. Executives attribute the rise in production to improved well productivity rather than increased drilling. This shift indicates that production growth is no longer the primary objective; longevity is. Industry leaders, particularly in the Permian basin, focus on long-term planning, which aligns with the goal of sustained longevity.
While OPEC may weather lower prices temporarily, the realization that global markets have less physical oil will eventually set in, as history suggests. Record U.S. production influences benchmark prices but does not signify a complete replacement for OPEC, especially Saudi oil. The market demands both, and OPEC recognizes this demand.
Meanwhile, OPEC is not idly observing the surge in U.S. shale production. The recent acceptance of Brazil as a member, even if not a full participant in production cuts, indicates OPEC’s strategic move to bolster its influence over global oil markets by expanding its membership beyond U.S. producers, as suggested by Reuters’ John Kemp in a recent column.