OPEC (Organization of the Petroleum Exporting Countries) produced 31.6 MMbpd (million barrels per day) of crude oil in September 2015, according to the data from its MOMR (Monthly Oil Market Report) released on October 12, 2015. Saudi Arabia produced 10.3 MMbpd of crude oil in September 2015. Iraq’s production fell by 85,000 bpd to 4.214 MMbpd in September 2015—compared to August 2015. Similarly, Iran’s crude oil production fell by 100,000 bpd to 2.8 MMbpd in September 2015.
OPEC has been producing more crude oil in order to offset lower crude oil prices and capture the market share of high-cost shale operators like the US. More supplies in the market will lead to a fall in crude oil prices. High-cost producers will pave the way to low-cost Middle East producers. It will be harder to sustain business.
US versus Saudi Arabia
OPEC’s strategy to capture market share worked very well with the US. Oversupply in the crude oil market and lower oil prices led US producers to cut back on their production. US production fell by 6% from the peak to 9 MMbpd in September 2015. OPEC’s kingpin is Saudi Arabia. It has been discounting its crude oil prices to the US. It’s marching ahead of its competitors in capturing its market share.
Russia versus Saudi Arabia
Saudi Arabia has been in a struggle with Russia in order captures market share in Europe and China. The intense fighting led to low futures price contracts with crude oil importers in Europe.
OPEC versus Saudi Arabia
Saudi Arabia is the major crude oil supplier to China, Japan, South Korea, and Taiwan. The Asian majors import around one-third of the crude oil from Saudi Arabia. Saudi Arabia discounted crude oil prices to the Asian majors in order to maintain and increase its market share. Kuwait is trying to discount more than Saudi Arabia. It wants to tempt Asian importers. Likewise, Qatar and the UAE (United Arab Emirates) are following the same strategy of discounting crude oil prices and luring Asian crude oil importers. This could increase the conflict among OPEC’s member nations. We might not see a production cut in the short term.
The struggle for market share and lower crude oil prices are driving innovation and increasing crude oil productivity. The lower drilling cost will also drive more oil production. Iran’s nuclear easing will also add to the glut. The conflict of interest between oil exporting giants like Russia and Saudi Arabia won’t trigger a production cut to boost oil prices. As a result, the market will force oil prices to equilibrium rather than manipulating crude oil prices. Then, we could see a new era of lower oil prices.
The new era of lower crude oil prices will impact US producers like Chevron (CVX), EOG Resources (EOG), Anadarko Petroleum (APC), and ConocoPhillips (COP) the most compared to conventional crude oil producers. The volatility in the crude oil market impacts ETFs like the Vanguard Energy ETF (VDE) and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).