16.06.202015:06 Forex Analysis & Reviews: Shale oil seems to be defeated

The coronavirus pandemic establishes its own rules, thus oil-exporting countries had to reduce oil production by millions of barrels due to the collapse in fuel demand.

Michele Della Vigna, head of energy research at Goldman Sachs Group Inc, said that eventually, when COVID-19 will be defeated, OPEC countries would become winners as fuel demand recovers.

Several years ago, experts suggested that the lack of investment after the oil market collapse in 2014 would lead to a gap between demand and supply from OPEC producers. However, the US shale was surprisingly resilient to shocks, so the deficit was avoided.

At the end of 2016, alternatively, the group, led by Saudi Arabia and other Middle Eastern oil exporters, entered into an alliance with former competitors to reduce production. The alliance consists of 23 countries and is known as OPEC +. Last week, the union confirmed that oil production would be reduced until 2022. The OPEC+ leaders will meet again to discuss the market situation on June 18.

It is hard to say whether the forecasts would turn out to be true, as the situation is extremely unstable. Moreover, OPEC competitors continue to gain momentum.

The continuous output of American oil shale, as well as oil supplies from the offshore fields could lead to a drop in demand by 7% by 2023, according to the OPEC annual forecast. The International Energy Agency predicts that the volume of oil production required from OPEC will not recover to last year's level until 2024.

However, experts are discussing the increase in demand. OPEC oil supply may rise by 17% between 2019 and 2025, reaching 34 million barrels per day, Goldman Sachs predicts.

US oil output has fallen by 15% over the past two months which undermines the Trump administration's idea of "US energy dominance". According to the IEA, the worst is yet to come, as costs in the shale industry have almost halved, and the total investment in oil and gas fell by $250 billion. In this regard, large oil companies like BP Plc and Exxon Mobil Corp. suffered multi-billion dollar cuts in capital spending. This is also a problem. According to Goldman, supply growth outside OPEC may stop.

The OPEC + agreement to reduce oil output may work for competitors' benefit. American shale producers could take advantage of this opportunity. For example, the largest US oil shale producer EOG Resources Inc is already actively operating.

Per Magnus Niswin, head of Rystad's research department, believes that a delay in investment amid a recession could provoke supply shortages in the coming years. However, the United Arab Emirates and Saudi Arabia may get more benefits and gain bigger market share, because their production costs are considerably lower. Besides, these countries have huge hydrocarbon resources.