May 15 2013

Is this the end of an era for OPEC?

By Kathleen Brooks, research director, Forex.com Is this the end of an era for OPEC?
The commodity axis has shifted, according to the latest International Energy Agency's (IEA) semi-annual review of the oil market. North America's shale oil boom is about to revolutionize the oil market, threatening OPEC's grip on commodities.

The IEA expects US oil production to grow by 3.9 million barrels of oil per day from 2012 to 2018, significantly faster than the 1.75 million barrels per day of growth forecast for OPEC producers.

While OPEC is still crucial to the global oil market (it is expected to pump 36.75 million barrels per day over the same time period), there is a new kid on the block and things in the oil market could be about to change drastically.

The US became a net exporter of oil products in 2011 and this is expected to grow in the next five years. From a market perspective, the rise of North America has big implications for the delivery, storing and refining of oil products. Europe, a long-term client of the Middle East, may choose US oil if it is perceived as a safer source of supply. For example, Italy, which relied on Libya for a large proportion of its oil supply, was left in limbo and with the threat of rising energy costs when the Arab Spring threatened Libyan oil production.

The key relationships that oil producers want, however, are with the fast growing emerging markets, including Africa and the Far East. The US can target these markets in two ways: first by exporting oil to these nations, and secondly by exporting the technology it has developed to access hard-to-reach oil reserves. This could be useful for resource-rich countries such as Russia, China and parts of Africa.

The world still needs OPEC oil, so even if the US takes some of the share of global demand, it is unlikely to significantly eat into OPEC and the Middle East's share of the pie, at least not in the next five years. However, the rise of the US as oil producer makes it less clear that the world needs an oil cartel that can set prices.

OPEC has adjusted production levels to try and fix prices, and essentially act as a floor in the oil price for more than 50 years. For example, in the recent past people have been concerned about OPEC action when Brent crude oil falls below USD 100 per barrel, believing this to be a line in the sand for the cartel. But now that a non-OPEC force has entered the market, will the cartel be able to call the shots on prices?

We expect OPEC's influence on the oil market to get chipped away over time, rather than collapse anytime soon. But even though near-term oil revenues are assured, going forward these countries may want to speed up the pace of diversifying their economies away from oil. This is particularly relevant for countries with large social spending programs like Venezuela and Iran.

To answer the question posed in the title of this piece, I think it is fair to say the era of OPEC dominating the oil market could be over.

The future for OPEC will be very different with increased levels of competition in the market. One thing a cartel does not like is competition. Some OPEC members like Saudi Arabia seem to be adjusting to the new environment, boosting supply to meet demand rather than concentrating on restricting supply to boost prices. This is a smart approach and if other members don't follow suit then they could find their slice of the oil market pie gets smaller in the coming years.

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