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US-Saudi Arabia market share rivalry: Its impact on oil prices

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Nov. 20 2019, Updated 3:53 p.m. ET

US crude oil production

OPEC’s (Organization of the Petroleum Exporting Countries) share of the global oil market has fallen over the years as non-OPEC countries such as the United States and Canada have increased their output. High oil prices from 2010 to 2013 drove non-OPEC countries to develop new technologies and land techniques such as horizontal drilling and hydraulic fracturing. By the end of December 2014, the United States was producing 9.127 million barrels of crude oil a day, up ~15% from the prior year.

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Saudi Arabia’s market share decline

As domestic production increased, the United States imported less oil. In 4Q14, crude oil imports from Saudi Arabia dropped to 850,000 barrels a day. Saudi Arabia lost ~50% of its US customer base.

Shale oil has been available since the 16th century, but the high cost of extraction halted development for years. The price of OPEC’s crude was less than the the high cost of shale extraction. However, that all changed with the high reserves of shale oil, the high price of crude oil, and the recent advances in technologies such as horizontal drilling. These led to high crude oil production in the United States.

Saudi Arabia’s strategy

Fast-growing oil production in the United States has eaten into OPEC’s market share. This benefited oil companies worldwide but negatively impacted OPEC nations such as Saudi Arabia that had already cut production.

In order to regain market share, OPEC decided to maintain production output, which naturally sent oil prices falling.

The low price of oil will negatively impact high-cost shale oil producers in the United States. These companies include Laredo Petroleum (LPI), Whiting Petroleum (WLL), and Marathon Oil Corporation (MRO). These companies are all major parts of energy ETFs such as the Energy Select Sector SPDR (XLE). The United States Oil Fund (USO) is down by ~56%, and ProShares Ultra crude oil ETF (UCO) is down by ~81% from June 2014.

So what does the price of oil have to be in order for OPEC to regain market share?

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