OPEC needs to learn to live with Shale oil producers: MUFG

Tug of war between OPEC+ and shale is now a permanent fixture of oil markets, and if the OPEC can’t beat shale, the group needs to learn to live with them, MUFG noted in its latest report.

Noting that the oil market has reached a new order, the report said soft oil price ceiling poised by shale is a clear wake-up call for MENA regional OPEC producers.

“The economics of oil have changed leaving the market in a deep state of flux,” the report added.

“What started out in 2018 as genuine concerns surrounding multifaceted geopolitical risks embedded on the front end of the oil curve have been overshadowed by the continuing tussle for market share between OPEC+ members and shale producers,” Ehsan Khoman, Head of MENA Research and Strategy MUFG, wrote in the report.

Structurally, the report said, the organic cost declines that the shale industry has generated through technological advancements, the optimization of drilling and completion techniques as well as operational efficiency gains has altered oil dynamics with US shale breakeven costs now averaging $43-55 a barrel.

Moreover, Khoman said, shale producers have adapted to fluctuations in oil price dynamics with flexibility, becoming smarter, leaner and more efficient, solidifying the industry’s positon in global oil markets.

“This threatens OPEC+ producers, with the spectre of an endless iteration of production cuts that simply results in them making way for increased market share for shale,” he added.

The report however noted that in part, shale players are the victims of their own success flooding the market with cheap oil and driving down the price.

Looking ahead, the report said, the central oil story in 2019 remains shale’s phenomenal growth and how OPEC+ producers can respond. It is the transformative impact that the shale revolution has had, and will continue to have, on global oil supplies.