Groundhog Day for OPEC

Both the API and EIA agree: U.S. crude oil inventories shrunk last week - by millions of barrels. U.S. crude oil inventories are down based on five-year averages. Globally, demand is exceeding supply too, but as driving season comes to a close, that could be about to end, leaving OPEC+ in a bit of a sticky situation. 

It’s reminiscent of a decade ago when OPEC refused to cut production in hopes that falling prices would squeeze out higher-cost U.S. shale. OPEC chose not to cede market share to the United States by withholding production and bolstering prices, handing the U.S. a win. After a couple of years of pressure, Saudi Arabia learned a hard lesson - its defense of market share allowed U.S. shale to claim more market share. U.S. production rose, eroding Saudi Arabia’s share. OPEC soon cried uncle, and a production cut was implemented to stabilize oil prices.

OPEC is faced with a similar situation today. Future global oil demand is the subject of much debate. OPEC, of course, has the rosiest outlook for global oil demand. Of the major forecasters, the IEA sees the least demand for next year. If this week’s oil price route is any indication, crude oil markets are of the clear view that there is another supply overhang looming. OPEC must at least to some extent agree with this too, announcing on Thursday a two-month delay to its planned output hike that was supposed to begin in October. 

This will see a delay of 180,000 bpd coming back onto the market - at least theoretically. But we’re already seeing signs that Saudi Arabia is having a hard time rallying the troops when it comes to sticking with the oil production pact. Iraq is overproducing. The UAE is chomping at the bit for production increases and has fought hard to redo the baseline that would allow it to produce more. Iraq has vowed to curtail oil exports (not production) for even longer to compensate for its chronic overproduction. This is noteworthy in that oil prices show a clear need for OPEC to continue its production cuts for longer, not to lift oil prices but to keep them from sinking further. In so doing, however, they are giving U.S. shale a gift - they are keeping oil prices higher and ceding market share to the United States. 

The question is, is this the new norm? Has at least Saudi Arabia - if not the whole of OPEC+ - accepted the fact that it's better to hold prices higher and give market share away? If this is to be the new norm going forward, with Saudi Arabia content to wait into oblivion if it must, is the rest of OPEC willing to do the same? If not, Saudi Arabia may find itself ceding market share not just to the United States but to other OPEC members as well, such as Iraq and the UAE.