OPEC leaders privately admit that the US oil industry’s high-tech flexibility is a competitive advantage that will enable the country to respond quickly to the market’s demand when prices start going up again. This also means that the United States will become the world’s new swing producer, which is the role that has so far been held by Saudi Arabia. Analysts say that unlike the US, which is leading the short-term market competition, the OPEC cartel is turning its attention to complex, technologically advanced and thus also costly long-term projects, such as drilling in deep oceans.
“The oil surplus is slowly being drawn from the market. US oil production is expected to fall to less than 9 million barrels per day by the end of this year or early next year,” an OPEC delegate explained. “But there is one point that no one is looking at, which is the delay in the longer-term oil projects, these are 4-5 year projects. The postponement of these projects will impact the overall supply in the market,” he added.
The US model of the short investment cycle, which counts with the first returns after few months, is the most sensitive to fluctuations in oil prices. As a result, the spike in oil prices in June where American oil was trading above $60 a barrel drew out more shale production but the price drop in August will cause the opposite, OPEC thinks. However, in the long term, higher production from shale will be likely offset by lower production from conventional high-cost offshore projects from emerging countries like Brazil and Mexico.
Analysts agree that shale will be “a new swing producer of sorts”. Yasser Elguindi of Medley Global Advisors, an economic consultancy,explains that “because of its shorter investment cycle, when prices fall, shale producers will be the ones to cut first, but likewise when prices go up, they will also be the first to bring up production.” This is, however, not good news for those who are seeking 2-5 year investment projects.
