The US Shale Complex started getting traction in 2012 and it has not looked back. Of course there are many new technologies that give the US shale industry an advantage but when compared to OPEC, it still lags in terms of being a well developed system of oil production with global distribution. The US government had a 40 year block on exporting oil, which kept the US domestic market isolated but in the past two years, US crude oil, high quality shale oil has been dumped on markets and customers are happy with the product.
OPEC has been around a long time and as a result has strong ties across the globe. OPEC has had a strategy that has worked since the 1970s, and that is to hold prices high and keep inventories from building up. Of course, the leadership of OPEC wants to ensure that the members are able to balance their budgets as many of these countries are now suffering from an economic point of view – look at Libya, Iran, Iraq and other producers.
This year, Russia has worked closely with OPEC, much like it did in the past, by collectively cutting back production by 1.2 million barrels a day, thus driving the price of crude up by a third, to trade at $70 per barrel. This agreement or deal that helped drive up prices is under review as it may be extended. Iran has been the member state with issues that will only get worse. The US is working with eight countries to encourage them to not buy Iranian oil products – the goal is to drive Iran’s exports to zero.
The war between US Shale and OPEC intensified last year and resulted in volatile prices from late 2018 – price swings were violent and unforgiving. However, OPEC has stuck to its guns and kept production lower than demand thus driving prices higher, much higher.
We have one concern. What if the problems that Iran is having, higher inflation and a weaker economy while the US squeezes its oil exports? The US is now destabilizing the region by pulling its aircraft carriers out of the Gulf, thus leaving Iran and Saudi Arabia staring at each other. We think there will be war.