Shifting Sands: OPEC's Oil Market in 2014

There are even more pressing concerns than just the U.S. pursuing its own development of shale oil.

Jan 28, 2014 at 11:38AM

The United States is poised to be the world's largest oil producer by 2015, says the IEA. Yet, with the U.S. swiftly moving from oil importing to exporting for the first time in forty years, the oil markets have rarely been more volatile. With anticipated advances in shale oil extraction, classic oil producers seem to be confused as to what this radical shift in energy consumption might mean. Unfortunately, there are even more pressing concerns than just the U.S. pursuing its own development of shale oil. 

Iraq and Libya
OPEC continues to commit to a benchmark of 30 million barrels per day, even as many institutional concerns in the Middle East and Africa continue or worsen. Iraq is still a hotbed of sectarian violence, and Libya's lackluster oil extraction and refining capabilities threaten to undermine previously set quotas. In the case of the former, solutions seem highly unlikely given the ethnic divide between Iraqi Kurdistan and central government officials.

Libya's situation, though less ethnically driven, is perhaps more dire due to the highly political nature of current conflicts. Current efforts to return oil production and distribution facilities to the central government continue to go unresolved as militias formed in the wake of the 2011 civil war control all major ports in Cyrenaica. Given the existence of additional conflicts between the government and tribal communities, this has caused Libyan oil production to slide deleteriously to half of its 2012 production levels (1.37 mmb/d).

This failure to meet quota is understandable, considering the rash of political turnover that has occurred in the area over the past several years. What this creates is an extremely fluid market in which many other oil producers (including other OPEC member states) move to snap up as much of the available market as possible.

A feeding frenzy
Normally, this may have been more controlled, but a feeding frenzy has erupted in the wake of the possible detente between the West and Iran. Iran, seeking to make up for lost revenues under sanctions, pushes for increased production levels at the cost of a diminished price per barrel. Such signalling will cause increased tension between Iran and its fellow OPEC members, many of which will be forced to restrict production if Iran receives this consideration. Given Iranian calls to scale up oil production from 2.5 mmb/d to 4 mmb/d, further strain will likely be created with Saudi Arabia as its oil primacy is eroded. 

OPEC is further threatened by oil producing nations outside of the organization. While oil productivity in these states may not approach OPEC's collective oil capabilities, the addition of regional oil producers such as Russia, China, and Canada continue to weigh heavily on OPEC internal decisions. As one former U.S. State Department official notes, OPEC risks "significant erosion of market share and non-OPEC production rises." Despite this additional concern, there is a spark of hope for OPEC in the coming year. Shale oil production is a new technology and still relatively costly versus classic oil production techniques. This in turn causes shale producers to pursue a minimum price level of 80 USD/b.

Bottom line
Should OPEC manage to control its internal issues and disputes, this costly shale oil could be a godsend. The only question is whether or not to pursue a course that induces a drop in oil prices (and drive shale oil out of the sort term) or give in and lose market share to other production avenues. Neither solution is ideal but with economists noting a $90 per barrel price as too high, OPEC needs to prepare for a market future where oil prices continue to slip from 2012 peaks. 

The face of the oil market is changing rapidly in the face of new technology. OPEC needs to act to retain its place or be slowly relegated to a far less influential position.

Another threat looming for OPEC
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!

 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers