US oil has got its groove back – now Opec has to react

There are plenty of short-term variables buffeting the price of crude oil at the moment: the prospect of another round of production cuts, the strength of the Chinese economy and the possibility of an escalation in the Israel-Gaza conflict.

But one long-term factor has perhaps not been fully considered: the rise of the US oil business as an force in international markets.

How Opec reacts strategically to the re-emergence of American oil at its ministerial meeting on November 26 may set the direction of global energy markets for the rest of this decade.

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Daniel Yergin, the venerable historian of the oil industry, posed this question in a recent paper. Why, he asked, has the instability in the Middle East not led to a spike in crude prices?

Yergin identified three reasons.

First, financial investors in the oil market – whom some call “speculators” – are not panicking about supply disruption, at least not yet. The Israel-Gaza conflict would have to escalate considerably to have the kind of market impact that was seen in 2019 when Saudi Aramco’s facilities in Abqaiq and Khurais were attacked, let alone to reach the level of the 1973 embargo.

Second, the producers of the Gulf states are not mere pumpers of crude. All are implementing long-term plans to diversify their economies away from oil dependence, and do not want to rock that strategic boat with a geopolitical gesture.

Third – and most important in Yergin’s view – is that the US, once the world’s biggest oil importer, is now its largest producer.

The United States produces more than 13 million barrels per day, up 1 million bpd over the past year. Russia is producing 10.5 million barrels and Saudi Arabia 9 million. Nearly 5 million barrels of American crude are going for export.

Both the International Energy Agency and Opec now predict oil demand will increase by rather more than 2 million barrels per day in 2024.

The resurgence in US shale – the main element of the American oil bonanza – and the opening up of supply in Venezuela, Brazil, Guyana and Canada means this extra demand can be met from supply outside the Opec+ grouping.

This does not make the US top dog in the global oil market. Its share of total production – about 13 percent – is still far below the combined share of the Opec+ countries, which make up around 45 percent.

But it does give Opec+ something else to take into consideration when it contemplates an extension of its cuts, or a bigger round of cuts next year, as well as a re-basing of the existing regime of quotas.

Saudi Arabia in particular must calculate the effect that an accelerated cuts schedule would have on its ambitious economic strategy.

The kingdom has already shouldered most of the economic burden of re-balancing the global oil market and cannot be expected to do so indefinitely, in effect handing market share to the US and Russia.

The US shale revival may be a flash in the pan. The industry is incredibly sensitive to shifts in US financial markets – as was illustrated in April 2022 when the industry fell off a cliff as the pandemic hit.

It feels different this time, though. The American oil producers seem to have recovered their self-confidence, exemplified by the recent multi-billion-dollar acquisitions by Exxon Mobil and Chevron.

The waning power of the environmental, social and governance lobby in the US may have something to do with it and the White House – with one eye on next year’s presidential election – is unlikely to do anything that drives up pump prices.

The last time American oil was such a force in global markets was in 2016, when Saudi and Russian competitors responded by forming the Opec+ alliance, the first strategic realignment of international oil markets for decades.

How will the alliance react this time?

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He also acts as a consultant to the Ministry of Energy of Saudi Arabia