OPEC, which pumps about 40 percent of the world’s oil, is
scheduled to meet in Vienna on 2nd June to assess its output policy. The group
is unlikely to set a production target as it sticks with Saudi Arabia’s
strategy of squeezing out rivals such as higher-cost shale drillers.
Gone are the days when OPEC, led by Saudi Arabia enjoyed
power to control oil price. Now it is desperately trying to retain its market
share by pumping as much oil as possible. It has fallen in the trap of United
States, which pampered the kingdom to raise oil price to facilitate shale oil
production.
After having achieved the status of largest oil producing
country, the US no longer to handhold Saudis, in fact by lifting sanctions
imposed on Iran, Saudis feel the real pinch. They know Iran is adamant at attaining
its pre-sanctions output. Saudi’s suffering from myopia are unable to read
writing on the wall.
There can’t be any doubt that surge in supply of shale oil
has reduced Saudi ability to balance crude markets. To be honest Saudis just
can’t play any balancing role because of fear of loss of market share. In the
past OPEC’s practice was to vary output to manage crude prices.
Market forces are too strong now, and you can’t play against
those. Crude has surged more than 80 percent from a 12-year low earlier this
year on signs the global oversupply will ease amid declining output in Nigeria
and non-OPEC countries including the U.S.
Experts estimate current global inventories at about 5
billion barrels oil, including crude in floating storage, and say the market is
oversupplied by about 1.5 million barrels a day. Just to cut production by 1.5
million barrels a day and the next day the price goes up and the other
producers will take the whole share -- there is no benefit for OPEC in that.
High oil prices in recent years were an incentive for many
high-cost fields to be tapped. If shale oil companies were to collapse due to
financial strain imposed by low prices, this might cause another crisis like
the one in 2007 and 2008, as many of them owe large debts to banks.
