Ignore the recent surge in crude oil prices because $20 per barrel oil is on the way, according to a Citigroup report obtained by Tom Randall of Bloomberg. And $20 per barrel oil could mean the end of OPEC as we know it, the report adds.
Oil prices have inched up in recent weeks from below $50 per barrel in January to around $58 a barrel on Tuesday. But this surge in prices is just a “head-fake,” according to Citigroup, as U.S. oil production is still rising. On top of that, Russia, Brazil, Saudi Arabia, Iraq and Iran have not cut back production to boost prices.
Instead the world’s major players are pumping out more oil to maintain market share.
And it doesn’t look like production is going to slow down anytime soon, said Edward Morse, who heads up commodity research at Citigroup. Morse said that West Texas Intermediate crude oil prices could fall from about $52 per barrel to $20 per barrel “for a while.”
But what does all of this mean? Morse says the recent oil market rollercoaster shows that U.S. shale oil producers have defeated OPEC. As Bloomberg notes, U.S. oil companies have “broken OPEC’s ability to manipulate prices and maximize profits for oil-producing countries.”
“It looks exceedingly unlikely for OPEC to return to its old way of doing business,” Morse wrote in his report. “While many analysts have seen in past market crises ‘the end of OPEC,’ this time around might well be different.”
Traditionally, OPEC nations have colluded with one another to cut production and raise oil prices. But now with booming production in the U.S. and Canada, OPEC states are no longer able to exercise the control over oil markets they once had.
Oil prices have only been allowed to fall so far because OPEC decided not to slash production last fall — a move that surprised markets and sent oil falling even further. In the past OPEC was quick to cut production if prices fell too low, but this time Saudi Arabia wanted to wage a price war against now booming U.S. oil production.
Saudi Arabia, OPEC’s largest oil producer, has seen its market power erode in North America because of booming oil production from shale formations in North Dakota and Texas as well as rising oil sands production in Canada. All of this has served to lower American imports of oil from OPEC states.
The Saudis banked on the fact that North American production costs were much higher than Middle Eastern wells, meaning that lower prices would force U.S. and Canadian companies to curtail production — stymying the shale boom.
But that hasn’t exactly happened. North American production has become cheaper in recent years, and now the Saudis are locked into a market situation where oil prices are well below what the Kingdom needs to fund its government and welfare programs.
OPEC is a cartel of petroleum-producing nations that collude to keep oil prices artificially high. The group is essentially controlled by Saudi Arabia, the group’s largest oil producer, but in the last year the Saudis have found it hard to get other member states to go along with its plans.
U.S. companies in the oil industry are also feeling the pain of lower oil prices. They’ve responded by slashing rig counts, jobs and future investments. But U.S. production doesn’t seem to be slowing down very much, according to Citigroup.
“There are strong indications that U.S. shale producers are taking a hit, and by the second half of this year a lot of marginal barrels will disappear from the market and demand will rise for OPEC members,” an OPEC official told The Wall Street Journal.
But OPEC member countries are being hit hard as well, losing billions of dollars in oil export revenues. OPEC nations need oil prices to be much higher in order to fund their respective governments.
“OPEC’s days as a cartel able to rook us with high oil prices really are over,” writes Tim Worstall, an economics writer for Forbes. “For the usual reason that all monopolies and cartels eventually die, technological change.”
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