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.
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.
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.
By Alahdal A. Hussein
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A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions
Source: U.S. Energy Information Administration, U.S. liquefaction capacity database
On May 31, 2019, Sempra Energy, the majority owner of the Cameron liquefied natural gas (LNG) export facility, announced that the company had shipped its first cargo of LNG, becoming the fourth such facility in the United States to enter service since 2016. Upon completion of Phase 1 of the Cameron LNG project, U.S. baseload operational LNG-export capacity increased to about 4.8 billion cubic feet per day (Bcf/d).
Cameron LNG’s export facility is located in Hackberry, Louisiana, next to the company’s existing LNG-import terminal. Phase 1 of the project includes three liquefaction units—referred to as trains—that will export a projected 12 million tons per year of LNG exports, or about 1.7 Bcf/d.
Train 1 is currently producing LNG, and the first LNG shipment departed the facility aboard the ship Marvel Crane. The facility will continue to ship commissioning cargos until it receives approval from the Federal Energy Regulatory Commission to begin commercial shipments. Commissioning cargos refer to pre-commercial cargo loaded while export facility operations are still undergoing final testing and inspection. Trains 2 and 3 are expected to come online in the first and second quarters of 2020, according to Sempra Energy’s first-quarter 2019 earnings call.
Cameron LNG has regulatory approval to expand the facility through two additional phases, which involve the construction of two additional liquefaction units that would increase the facility’s LNG capacity to about 3.5 Bcf/d. These additional phases do not have final investment decisions.
Cameron LNG secured an authorization from the U.S. Department of Energy to export LNG to Free Trade Agreement (FTA) countries as well as to countries with which the United States does not have Free Trade Agreements (non-FTA countries). A considerable portion of the LNG shipments is expected to fulfill long-term contracts in Asian countries, similar to other LNG-export facilities located in the Gulf of Mexico region.
Cameron LNG will be the fourth U.S. LNG-export facility placed into service since February 2016. LNG exports rose steadily in 2016 and 2017 as liquefaction trains at the Sabine Pass LNG-export facility entered service, with additional increases through 2018 as units entered service at Cove Point LNG and Corpus Christi LNG. Monthly exports of LNG exports reached more than 4.0 Bcf/d for the first time in January 2019.
Source: U.S. Energy Information Administration, Natural Gas Monthly
Currently, two additional liquefaction facilities are being commissioned in the United States—the Elba Island LNG in Georgia and the Freeport LNG in Texas. Elba Island LNG consists of 10 modular liquefaction trains, each with a capacity of 0.03 Bcf/d. The first train at Elba Island is expected to be placed into service in mid-2019, and the remaining nine trains will be commissioned sequentially during the following months. Freeport LNG consists of three liquefaction trains with a combined baseload capacity of 2.0 Bcf/d. The first train is expected to be placed in service during the third quarter of 2019.
EIA’s database of liquefaction facilities contains a complete list and status of U.S. liquefaction facilities.