The Oil Powerhouses Replacing OPEC

Authored by Irina Slav via Oilprice.com,

Three countries currently account for close to 40 percent of global crude oil production and only one of these countries is a member of the Organization of Petroleum Exporting Countries. The three are Russia, the United States, and Saudi Arabia and as their clout over oil markets increases with rising production rates, OPEC’s is set to decline, at least temporarily.

Reuters’ John Kemp noted in a recent column on the topic that the so-called troika now called the shots more than ever before: all three countries produced north of 11 million bpd a day in October, a record high and more than the combined production of the rest of OPEC. And, according to OPEC, this state of affairs will continue to develop in a direction unfavorable for OPEC with the troika’s combined production rising to over 40 percent of the global total this year while OPEC’s share falls below 30 percent.

Each of the three producers has its own oil production policy that is relatively independent of other producers’. True, Saudi Arabia and Russia have been playing on the same team for the last two years to a large extent because the game strategy has been mutually beneficial. Yet we have seen abundant indications that the moment the interests of the two begin to diverge each is likely to drop the team game and pursue its own priorities. The U.S. in the meantime has become the single largest swing factor outside the OPEC+ club with relentlessly rising production that could push it to the top spot globally next year.

This production will only continue to rise if OPEC now decides to start cutting production once again in order to push prices higher, further strengthening the U.S.’ importance on the global oil market. So, does this all mean OPEC is as good as dead? For the time being, mostly yes. Most of its members, as Kemp notes, fall in one or more of the following categories: “is struggling under sanctions, mismanagement and unrest; is too small to matter; is maximizing production rather than participating in output controls; or simply aligns its output policies with those of Saudi Arabia.”

The future remains uncertain, however. Most respectable forecasters such as the Energy Information Administration and the International Energy Agency are upbeat about the growth of oil demand, but the upbeat forecasts come with conditions: the IEA most recently said in its World Energy Outlook that producers will need to up investments in new conventional production substantially to be ale to respond to this demand. Failing that, the U.S. would have to increase its shale oil production by as much as 10 million bpd in the seven years to 2025, which is a bold target, to say the least.

OPEC members are obvious candidates for some of this production growth. Despite a lot of worry around the cartel’s spare capacity earlier this year when it became clear the cuts need to be reversed to rein in prices, some of the members, such as Iraq and Libya, are on track to grow their production. True, this growth will likely be nowhere near the more than a million bpd that U.S. producers have added in the past year, but it could be substantial in the case of Iraq, if the political and price conditions allow it.

What’s more, Venezuela and Iran are unlikely to spend the rest of eternity under sanctions. There is a possibility, however, remote at the moment, that these two could at some point reverse the decline in production they are experiencing now. Iran has already demonstrated it could ramp up pretty quickly if given the chance. In other words, OPEC’s clout on oil markets may be waning but it might be too early to bury the cartel for good just yet.