Linn Granite Wash Drilling

Image: LINN Energy.

The prevailing theory about OPEC's insistence on maintaining oil supply, and even increasing production slightly, is that the cartel was trying to squeeze U.S. shale producers out of the market. U.S. oil production has more than doubled over the past decade, and OPEC has virtually stood still as the shale revolution took hold. 

This became a problem when oil markets became oversupplied and someone had to budge. OPEC didn't want to be the ones to lose market share, so it let oil prices sink, hoping U.S. shale and Canadian oil sands producers would cut production instead. But what happens if that strategy proves successful?

US Crude Oil Production Chart

US Crude Oil Production data by YCharts

U.S. oil producers are giving in already
According to data from the U.S. Energy Information Administration, U.S. oil production has already dropped nearly 500,000 barrels per day since June, an amazing drop when you consider that production was growing at a pace of about 100,000 barrels per month until June 2015.  

Us Field Oil Production

Data: U.S. Energy Information Administration. Chart by author.

Compounding matters is the fact that U.S. consumption has been on the rise in 2015 as more SUVs hit the road. We know that oil markets are vastly oversupplied today, which is why prices are low -- but what happens when supply drops and demand jumps in 2016?

What's next?
Ecuador's President Rafael Correa brought up an interesting point last week that shouldn't go overlooked in oil markets. If oil prices stay low for too long, the charts I showed above will continue their current trends, and soon oil will be undersupplied -- and prices could spike. 

Even OPEC Secretary General Abdalla Salem el-Badri recently said that low oil prices would soon come to an end as demand comes more in line with supply.

It's ironic that it's actually in everybody's best interest to have stable oil prices, wherever they end up. U.S. producers could plan production effectively, OPEC countries could plan their budgets, and consumers of oil could make educated decisions on how much to consume and whether or not to buy a gas-guzzling car. 

But market forces often push oil prices sharply higher or lower depending on short term supply and demand. If big oil players aren't careful, they could swing prices sharply higher as production in the U.S. falls.

Could the U.S. shale business recover?
It's been easy for industry observers to predict that rising oil prices would lead to sharply higher production in the U.S., as drillers can quickly deploy workers in oil fields as prices rise. But debt markets may not provide the financing they once did for oil producers, and OPEC probably wouldn't allow prices to rise fast enough to cause a flood in shale investment.

I'm afraid that no matter how you look at it, OPEC is winning its battle against shale oil. The only question now is: when and how fast will oil prices rise?

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