OPEC’s and Saudi Arabia’s crude oil production
OPEC’s (Organization of the Petroleum Exporting Countries) production rose by 230,100 bpd (barrels per day) to 31.7 MMbpd (million barrels per day) in November 2015, as compared to October 2015. This was OPEC’s highest production level since April 2012. Saudi Arabia’s production fell by 25,200 bpd to 10.1 MMbpd in November 2015. Iraq’s production rose by 247,500 bpd to 4.3 MMbpd during the same period. OPEC’s and Saudi Arabia’s plans to boost production will weigh on the crude oil market.
Historical perspective and production capacity
History shows that crude oil prices collapse whenever Saudi Arabia increases its production. Saudi Arabia acts as a swing producer in the global oil market, despite record production from Russia. The chart above clearly shows that the overall increase in Saudi Arabia’s production has led to the fall in West Texas Intermediate (WTI) and Brent crude oil prices.
OPEC and Saudi Arabia are very clear that they want US shale oil producers out of business. Why? US shale oil producers are a long-term threat to the revenues of Middle Eastern oil producers. They want US shale operators like Whiting Petroleum Corporation (WLL), Continental Resources (CLR), Oasis Petroleum (OAS), and EOG Resources (EOG) to shut down their businesses permanently.
This is not possible unless crude oil prices are so low that US oil producers curb production due to high break-even and production costs. Thus, Saudi Arabia plans to produce more oil until shale operators shut down their business due to lack of capital investments. OPEC’s rising production capacity in 2016, per the EIA (US Energy Information Administration), should put further pressure on the crude oil market, as it has the advantage of scaling up production as soon as possible.
US producers’ strategies
Meanwhile, US and global oil companies are engaging in merger and acquisition activity, raising capital from the bond and equity market, hedging crude oil futures, improving technologies, and trying to plan more effectively to sustain the depressed crude oil market. Companies like Royal Dutch Shell (RDS.A), Total (TOT), and BP (BP) are looking for assets with lower break-even and production costs in countries like Iran.
ETFs like the United States Oil Fund LP (USO), the Vanguard Energy ETF (VDE) and the iShares US Oil Equipment & Services ETF (IEZ) are affected by the rises and falls in crude oil prices.
Read the next part of this series to learn where crude oil prices are heading.