Petrostates in Peril
OPEC’s Own Outlook Getting Grimmer

Every five years OPEC releases a long-term outlook, and a lot has changed since the last report in 2010. American shale has come on to the scene in a big way, contributing to a global oversupply that, coupled with weak demand, has helped depress prices more than 40 percent in barely a year. OPEC hasn’t acted to constrict production and set a floor to this price slide, consigning its petrostate members to market conditions that push regimes into the red. As Reuters reports, OPEC’s next long-term report suggests prices won’t be rebounding anytime soon:

A draft report of OPEC’s long-term strategy, seen by Reuters ahead of the cartel’s policy meeting in Vienna next week, forecast crude supply from rival non-OPEC producers would grow at least until 2017.

Sluggish global demand for oil means the call on OPEC’s crude will fall from 30 million barrels per day (bpd) in 2014 to 28.2 million in 2017, effectively leaving the group with two options – cut output from current levels of 31 million bpd or be prepared to tolerate depressed oil prices for much longer.

Saudi Arabia has pushed OPEC into its current strategy of competing with non-OPEC producers for market share in the hope that U.S. shale producers might assume the role of the market’s swing producer. While in the past OPEC had to cut production to buoy prices, the Saudis are hoping the high cost of fracking will force American producers to necessarily draw down operations when they can no longer stay profitable, allowing OPEC to produce at will without prices plunging as a result of oversupply.

But it’s not clear that the Saudis and OPEC can have their cake and eat it, too. The breakeven price of oil for most of the cartel’s regimes require is higher than the price most American shale operators need to turn a profit, meaning that even if U.S. shale takes the swing producer mantle, OPEC members will still be saddled with a global price too low to stay solvent. Moreover, shale firms are cutting their own costs through innovative new techniques, like drilling multiple horizontal wells per rig, allowing them to keep producing even in today’s bear market.

OPEC’s new draft report suggests the cartel is keenly aware of the growing threat they face from the rest of the world’s suppliers, and it should give members plenty to discuss at next week’s semiannual meetings.

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