The New Shale Order: OPEC Fades, Shale Booms, China Rise

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The new oil order: OPEC fades, shale booms, China rise Peter Pulikkan, Philipp Chladek, William Foiles, William Hares, Lu Wang, Michael Kay, Andrew Cosgrove, Gurpal Dosanjh Bloomberg Intelligence analysts

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OPEC fades, shale booms, China rises: The forces reshaping oil

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Structural changes are sweeping the global oil market. Power within OPEC is becoming more diffuse, weakening the cartel. A new oil axis centered in the Americas, driven increasingly by private enterprise as markets are liberalized, is counterbalancing the resource-nationalistic and troubled Middle East. As these shifts alter supply, China’s growing appetite for imported crude is reshaping demand and challenging the dollar’s central role in the oil trade. These changes will reverberate long after prices stabilize.

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OPEC’s Golden Age fades into history with cartel over a barrel

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OPEC has less influence than during its halcyon days in 1974, when it accounted for about half of the world’s total supply of oil. Today it contributes about 40%. The survival of any cartel depends on two factors: the scarcity of the commodity and members’ respect for its quotas. The shale boom and OPEC members’ fiscal distress threaten stability, while Iran and Iraq may be capable of approaching Saudi Arabia’s output by decade’s end. A multi-polar OPEC rife with competing agendas will likely wield less power.

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The coming age of petro-capitalism and oil market liberalization

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With OPEC relaxing its grip on oil supply, market forces now set the clearing price. Non-OPEC nations make up about 60% of world output, and almost 40% of non-OPEC supply is from the axis that runs from Canada’s oil sands, down through the shale fields of North Dakota and Texas and over the Gulf of Mexico to offshore oil deposits near Brazil. This new, innovation-driven center of production is driving further liberalization of oil markets and eschewing resource nationalism, contrary to its Middle East competitors.

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Petro-Capitalistism Confronts Resource Nationalism

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Russia’s dash for sway over Mideast choke points challenges U.S.

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Russia’s geostrategic circling of the Middle East has implications for the global oil market. In Syria, it seeks to establish a foothold from which to project power across the region, challenging America’s influence. The warravaged nation is linked to the Bab-el Mandeb Strait, the choke point between the Horn of Africa and the Arabian Peninsula, via the Mediterranean and the Suez Canal. Russia is also cultivating ties to Iran, which sits next to the Strait of Hormuz, the Persian Gulf’s only outlet to the sea.

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Middle East Flash Points - Syria and Yemen Armed attack Oil fields Ungoverned region

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Oil’s center of gravity moves east as China takes center stage

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For more than 100 years, oil’s story was one of production growth to supply a primarily Western-driven market. Now demand is increasing across emerging economies and almost flat everywhere else. In early 2014, China surpassed the U.S., long the biggest importer, to become the top global importer of crude. The IEA projects that China will import 7.1 million barrels a day in 2019 and most of the growth will be long-haul trade from the Middle East. This shift is moving the center of oil trading and pricing to Asia.

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Future Crude Trade Routes Lead to Asia Crude Exports in 2019 and Growth in 2013-19 for Key Trade Routes1 (million barrels per day)

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Crude oil correction resembles 1985 in back to the future twist

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Global economic and oil-market shocks sent crude plunging 50% or more several times in recent decades. OPEC policy changes (1985-86), U.S. recessions (1990-91 and 2001), the Asian financial crisis (1997-98) and the global financial crisis (2007-09) all drove volatility The current price drop resembles 1985-86. After prices jumped in the 1970s, new technology opened up fields in the North Sea and Alaska. In 1985, Saudi Arabia changed policy to raise its market share, ushering in a lost decade for oil.

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Precedent Oil Price Corrections

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Bloomberg Intelligence offers valuable industry and company data, interactive charting and written analysis with government and credit insights from a team of independent experts, giving trading and investment professionals deep insight into where crucial industries stand today and where they may be heading next.

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