Since the beginning of the current oil market downturn, I have read many articles talking about who won the oil market-share war. Many of these articles pointed at Saudi Arabia as the winner, yet the rest pointed at Shale oil producers as the winner of the market-share war. This fact has changed over time. In early 2015, Shale oil producers seemed to be the winner as they were holding on and their oil production continued increasing. This trend changed in the second half of 2015 and into early 2016 when oil prices dropped sharply and shale oil producers felt the pain. There were more US shale oil companies filing for bankruptcy and US shale oil production’s decline accelerated. At that time people begun to see Saudi Arabia as the winner in the oil market share war which KSA started it back in 2014.
But the Saudis’ victory was conditioned and therefore short-lived. What does that even mean? It means, if Saudi Arabia wants to continue being the winner in this war, it must keep oil prices at low levels somewhere below $40/bbl. Saudi Arabia can do that. In fact, it did, but there was a big issue. Yes, Saudi Arabia can keep oil prices at low levels by pumping at full capacity, but time has proved that it can’t afford to take the negative impact of low oil prices on its budget for a longer term. This fact became more clear as Saudi Arabia begun it’s emotion game to support oil prices since February 2016. Right now, oil prices are above $50/bbl, and shale oil producers are ramping up their oil production and increasing their drilling activities, yet Saudi Arabia is supporting oil prices to go higher. Such an action made Saudi Arabia seems to be losing the war to shale oil producers.
Who Won The Market-Share War?
The winner and loser in the oil market-share war has changed over time in the last two years, and that makes us wonder. Who is really the winner? There should be one for sure. To know who is the real winner in the the current oil market share war, we should not be looking at who is winning in the short-term, rather, we should be looking at who is winning in the long-term. To do so, let us look at both parties involved in the current oil market-share war separately.
Saudi Arabia:
Saudi Arabia is the one who started the oil market-share war. Why? To squeeze shale oil producers out of the market and gain back its market-share. Did it achieve its goals? To certain degree, yes it did. Many shale oil producers filed for bankruptcy, and US oil production declined. But Saudi Arabia is now struggling financially as its oil revenue declined sharply. With such a financial situation, will Saudi Arabia be able to pursue its market-share war? Definitely not. Saudi Arabia is working hard to keep its oil production high. While doing so, it is also supporting oil prices with fake promises of oil production cuts. All these are clear signs that Saudi Arabia is blinking in the current oil market-share war. Therefore, it is only a matter of time before the Saudis completely accept the fact that shale oil producers are here to stay and shale oil will be their biggest market competitor.
Shale Oil Producers:
On the other hand, Shale oil producers are the ones who led us into the downturn as their oil production had grown throughout the last few years and Saudi Arabia didn’t like that. Shale oil producers are also the ones who paid the highest price and suffered the most as many of them filed for bankruptcy and others continued pumping taking a lot of losses waiting for oil prices to go up. But what many people are not focusing on is the fact that, shale oil producers are also the ones who benefited the most from the downturn. Increasing efficiency, cost reduction, lowering shale oil break-even prices, working hard to innovate and develop the current technology to help reduce the cost of production and increase the oil production. All these actions and their outcomes would have taken years to be achieved if not for the downturn. No one can deny the fact that shale oil producers suffered a huge loss, but it was a temporary loss. They are now stronger, more efficient and able to compete for the long-term.Â
In a nutshell, Saudi Arabia’s oil strategy seems to be more focused on short-rerm results rather than achieving long-term goals. Keeping oil prices above $100/bbl in the last few years enabled shale oil to grow. And back in 2014, Saudi Arabia’s decision to flood the oil market with oil and therefore drive oil prices down made shale oil producers stronger, Â more efficient and lowered its break-even prices. The Saudis may appear to be winning the war temporarily as they watch shale oil producers suffer losses and being squeezed out of the market, but the Saudis didn’t think about how long can they continue the war. Now KSA is weak, Â and it appears to be the one looking for high oil prices. While on the other hand, shale oil producers suffered for two years, Â but they won the war in the long term and they will continue to grow.
