The biggest black swan in crude oil market

Last week, the world’s most concerned crude oil meeting reached a deadlock for the second time, leading the outside world to speculate that the super alliance, which once threatened to beat the oil price to the sky, disrupted the financial market, and made the United States and Russia fear, has survived in name.

Previously, the market expected OPEC to reach an agreement at this meeting, increasing production by 400000 B / D per month from August to December this year, reaching an increase of 2 million B / D by the end of the year. However, the UAE suddenly backtracked and asked to raise the crude oil baseline on which the country reduced production, allowing it to produce an additional 700000 B / d. Russia suggested that the UAE calm down for two days, and said that OPEC should first have internal discussions.

Giovanni staunovo, commodities analyst at UBS, said any request to adjust production quotas was like opening a Pandora’s box, and other OPEC members might ask for similar adjustments. You can compromise. The first time, you can have the second, the third and the fourth. Internal differences mean that OPEC’s oil producing countries are not far from falling apart.

When OPEC quarrels with each other, another potential risk is Iran. If Iran and Biden reach a nuclear agreement, they will immediately return to the crude oil market, and the global crude oil supply will increase by one million barrels.

When OPEC was founded, it had a very legitimate motive: the price of oil should be decided by the developing countries that own it, not by the foreign companies that exploit it. They want to regain their legitimate rights and interests. It was part of the process of decolonization throughout the world, just as Egypt declared its sovereignty over the Suez Canal.

However, after winning the pricing power, OPEC soon began to abuse it. In this regard, the most famous situation happened in 1973, when these countries used oil prices to drag the whole world into the Middle East conflict.

The landmark event of OPEC’s decline is the sharp drop of oil price in 2014: it has continuously dropped from more than $100 / barrel for one and a half years, and the price has been cut to the lowest $25 / barrel twice.

The key turning point in 2014 came from the United States. In 2013, the daily shale oil production in the United States has reached 3.5 million barrels per day, and the total crude oil production has exceeded 7 million barrels per day. By 2014, the total production has exceeded 8 million barrels per day, and the increment is all contributed by shale oil. According to this growth rate, the United States can turn from a crude oil importer to a net crude oil exporter by 2020.

The key point is that the United States has not only become a net exporter of crude oil, but also surpassed Saudi Arabia and Russia to become the world’s largest crude oil producer in 2018.

The momentum of shale oil is bound to marginalize its position in the market. In November 2014, Saudi Arabia ignored the call of other OPEC member countries to reduce production, and suddenly increased production by a large margin, trying to squeeze us shale oil enterprises to death through competitive production increase of OPEC member countries. However, what Saudi Arabia did not expect is that the US shale oil not only survived strongly by borrowing money, but also became more efficient and production costs were greatly reduced.

In this process, Saudi Arabia itself is a little overwhelmed. After the collapse of oil prices in 2014, Saudi Arabia’s economic situation began to take a sharp turn. In 2015, Saudi Arabia had the highest government deficit in history – 98 billion US dollars, accounting for 15% of GDP.

So in 2016, Saudi Arabia led OPEC to reach an OPEC + production reduction agreement with Russia. Since then, oil prices have rebounded steadily. At the same time, Saudi Arabia began to consider taking advantage of high oil prices to let Saudi Aramco go public and get funds from the market to ease domestic financial difficulties.

However, what surprised Saudi Arabia again was that during this period, OPEC +’s production reduction efforts also saved the US shale oil. The shale oil production capacity expanded by 4 million barrels per day, surpassing Saudi Arabia and Russia in one fell swoop!

Last year, the Regal isolationist oil price once again collapsed due to the COVID-19 raid. Member States had to start cutting production to stabilize oil prices before the collapse. But when the oil price began to stabilize, the main members of the domestic market contended for market share for their own interests. The so-called OPEC actually only had a Saudi Arabia’s solitary family. Now the oil market is three points in the US, Russia and Saudi Arabia.