Everyone in the oil industry wants to see high oil prices back, because everyone wants to make money. Oil producing countries want to make higher revenues, oil companies want to earn more profits, and people want higher salaries and more jobs.
But, when high oil prices become the reason for the downturn in the oil market, and result in people losing their jobs, companies making no profits and others going bankrupt, then everyone starts to be afraid of the return of high oil prices.
How high oil prices led to the oil market downturn?
High and sustained oil prices in the past few years have made many uneconomical resources such as shale oil and deepwater’s more economical to be produced. Given the fact that oil prices were sustained at high levels during the past few years, many oil and gas companies started investing aggressively in developing these resources.
Crude Oil Prices
The investment growth provided a suitable breeding season for more advanced technologies to be developed. These technologies have helped to increase the oil production from such resources and lower its production cost. Everything worked well and the oil production of non-OPEC producers who have these resources started to increase such as U.S. oil production.
U.S Crude Oil Production
OPEC’ producers -led by Saudi Arabia- felt that the new oil production is a threat to their market-share. As a result, they changed OPEC’s policy from balancing the oil market and sustaining high oil prices into defending their market-share. They kept pumping oil, and the oil market become oversupplied. Oil prices started to fall and that is exactly what led to the downturn.
Today, after almost two years of the oil market downturn, oil prices are raising again. However, not everyone in the oil industry is happy about it, even those who want it so bad.
Why oil producers are afraid of the return of high oil prices?
On the one hand, OPEC members who -in the past few years- have worked closely to balance the oil market in order to keep oil prices high to increase their revenues are now fighting for market share. They have realized that, while high oil prices environment was good for them, it has also helped their rivals increase their production and become a threat to OPEC market share.
In order for OPEC members to eliminate that threat, oil prices must remain below their rivals’ breakeven prices. And lately, it become clear that $50 a barrel and below is where OPEC’s members should keep oil prices in order to prevent their rivals from recovering and growing.
OPEC members desperately want to see high oil prices back, but what can they do about it? Nothing. They know that if oil prices went above $60 a barrel, many shale oil producers will be back in the game and their production will increase. In fact at $50 a barrel oil price, we now hear that few U.S. oil companies planning to start drilling activities this year.
The Saudis and their market-share strategy’s supporters are afraid of high oil prices. It is like a nightmare for them now. If they want to see high oil prices again, then, they have to lose some of their market-share. And if they did that, they may end up losing their influence in the oil market. They can’t offered to do that, can they?
On the other hand, despite the fact that shale oil producers are desperate to see high oil prices back in order to make profit, they know exactly that the price of high oil prices is high.
If oil prices increased to a high level any time soon, which is highly unlikely, many shale oil producers will resume their oil production and drilling activities especially those who were squeezed out. That will result in higher global oil supply which if not met with a similar demand would lead to a fall in oil prices.
Given the fact that OPEC members are now protecting their market share, there is no way that they will cut their oil production to balance the market. What they will do instead, they will increase their oil production in order to create another downturn to force shale oil producers out of the market again.
In fact, they are doing it right now. OPEC oil supply continues to increase and that is driven by the return of oil output from Iran. Not only that, but also a few other members are planning to increase their oil output such as Iraq, Kuwait, Libya and UAE. Even during their meeting last week, they reached no production ceiling agreement. That means, they will not offer any help to balance the oil market other than forcing their rivals to cut their oil output.
What OPEC members are doing right now tells shale oil producers and other non-OPEC producers that the return of high oil prices is not a good idea for business. Shale oil producers do not want to experience another downturn because they were the ones hit hard by the current downturn. And this is the reason why they are afraid of high oil prices as well.
It seems now that all oil producers whether those of OPEC or non-OPEC agree that the risks of high oil prices are more than its benefits. Therefore oil prices will remain in a range of $40 to $60 a barrel for the rest of 2016 unless unexpected geopolitical or market event takes place.
