Can the newly wed Saudi and Russia contain American shale? In the intense tussle between the conventional petro-producers and the new born frackers, the just concluded production cut decision will be deciding event. Or it will decide the ultimate power of Saudi Arabia and the US Shale in directing the crude market.
Crude prices have shot up to $53 for the Brent variety in the global market on early Thursday. The deal is to reduce oil production by 1.2 million barrels per day in order to raise global prices.
Something is expected on price front as this is the first-time OPEC is able to wrap maximum support from non-OPEC producers like Russia to arrest the price decline.
As per the new agreement, the pain of the production cut is to be mostly borne by Saudi Arabia; though Russia’s participation is a notable development. Perhaps, Iran is the gainer as it can continue to supply more to regain its pre-sanction markets. Already, Iran is emerging the largest supplier of crude to China and India.
Oil’s journey from above $100 to below $30 was unbelievable. More surprising was Saudi’s non-production cut decision that allowed crude to settle sub $40s. No serious effort was made by Saudi and most observers say that it has produced investment crash in the Shale region.
For Shale, life was miserable during the last two year’s low priced era. Saudi’s price war has provided it a lesson that crude’s market is under the formal procedures of cartelization. Any new comer has to obey the rules or face the price war.
According to the Bloomberg data, US production fallen from 9.6 million barrels per day to 8.6 million barrels under price war. Similarly, investment has fallen by nearly $1 trillion.
Oil economists murmur that frackers (read shale) can’t live below $50. The newly inducted production cut brought back prices and may even nudge towards $ 60s. Here lies the opportunity of Shale to be active.