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Monday, 26th February, 2018

As the International Petroleum Week forum drew to a close in London last week, the murmurings across the conference floors and hotel lobbies were around the impending end of the current Russo/OPEC deal to cap production.  Would OPEC become ‘ROPEC’?

OPEC’s President Suhail al-Muzroui said the two groups are working together on a “framework partnership” which seemingly implies that they would work hand-in-glove to create a new super-cartel.  Al-Muzroui, who also doubles as the UAE’s Energy Minister, reaffirmed that OPEC countries alone would not balance supply and demand in the event of another price crash, adding that co-operation with Russia is now the “new norm”.

This united front isn’t for show.  Surging US shale output has shattered the forecasts of the global energy establishment and pushed the crude market back into surplus.  Barclays analysts are forecasting double-digit growth from some producers and the International Energy Agency called this the ‘second great wave of US shale growth’ and rightly so.  Production has soared by 1.3bn barrels per day over the past year.  This production threatens to match the entire growth in crude demand from China and the rest of the world in 2018.

Following the shakeout of shale producers in 2015, a super-cartel led squeeze on the market is less likely to happen a second time as shale investors and banks have imposed stricter disciplines, whilst technology has improved efficiency.  Most shale production can flourish in the $45-$55 whilst the honeypot location of the Permian Basin, in Western Texas can breakeven towards $25.  This is sobering when compared like-for-like with their OPEC counterparts.  According to the IMF, Saudi Arabia is estimated to have lowered their breakeven to around $70 (thanks to the Crown Prince MBS and his Saudi 2030 vision), and Iran, Iraq, Kuwait and Qatar will all run budget surpluses with crude above $58.90 (Bloomberg) – Shale is here to stay.

The US shale sector is in a stronger position now: managements are better, investors more aware, lenders more disciplined and the older, first generation shale fields having a second lease of life thanks to better technology and technical ability.  The US is swinging from an energy deficit to a likely surplus by 2021.

This new energy power offers Washington new strings to their strategic bows.  Economic, political and militarily.  Tougher sanctions can be applied on Russia, and even Iran or Venezuela.  Pressure has been relieved to act militarily on any rising tensions between Saudi Arabia and Iran in the Middle East.  Diplomatically, they have an edge/bargaining chip on trade agreements.

OPEC aligning themselves closer with Russia, in this year and the potentially the next, will help the super-cartel, support re-balancing in the market and bring them more leverage and power, but the energy goliath of the USA is just starting to awake from its slumber.