Opec losing market share in lieu of high oil prices isn’t sustainable
In the medium term, the kingdom’s strategy of restricting output to prop up prices is unsustainable; it is conceding too much market share to shale and other non-Opec producers
London — Oil cartel Opec’s share of the global oil market is progressively eroding as it attempts to keep prices artificially high by restricting its own production.
Opec’s share of global production fell to just 41.5% last year, the lowest since 2003, according to figures contained in the latest edition of the BP Statistical Review of World Energy, published on June 11.
Opec’s share will almost certainly shrink even further this year, to the lowest level since 2002, and before that the early 1990s, given the organisation’s output cuts and US sanctions on Iran and Venezuela.
The cartel’s members progressively increased their market share between 2002 and 2008, but since then, their share has been on a downward trend, which shows no sign of reversing. Opec’s combined production was up by just 2-million barrels per day (bpd) (5%) in 2018 compared with 2008, while non-Opec output climbed by 9.6-million bpd (29%) in the same period.
Saudi Arabia, Opec’s de facto leader, increased production by 1.6-million bpd (15%), while Iraq boosted output by 2.2-million bpd (90%).
Outside Opec, however, Canada raised output by 2-million bpd (62%), and the US boosted output by 8.5-million bpd (126%), mostly as a result of increased flows from onshore shale fields.
Saudi Arabia’s share of global output has remained stable since the 1990s, but many of the organisation’s other members have seen their share erode as a result of war, sanctions, unrest and mismanagement.
Saudi Arabia emerged as the undisputed leader of Opec in the 1990s after war and sanctions crippled production in rivals Iran and Iraq, and corruption, mismanagement and unrest hit output from Nigeria, Libya and Venezuela.
Saudi Arabia’s objective has been to maximise short-term export revenue, subject to the need not to jeopardise its long-term market position and protect its diplomatic relationship with the US. In practice, the kingdom has alternated between periods when it prioritised the defence of prices (at the expense of market share) and protecting market share (at the expense of prices).
In recent years, the kingdom’s dilemma has sometimes been eased when US sanctions have restricted exports from its regional rival Iran (and more recently from Venezuela). Sanctions on rival producers have allowed the kingdom to protect prices without sacrificing too much market share, so they serve both commercial and diplomatic objectives.
But the limits of this strategy are now becoming evident with prices struggling to rise even as Iran and Venezuela have been pushed almost entirely out of the market.
Long-term trends in both oil prices and market share are adverse to the kingdom, complicating the government’s ambitious goals for social and economic transformation.
US shale barrels
US shale firms and other non-Opec producers, including the major international oil companies, have been the biggest beneficiaries of Saudi Arabia’s and Opec’s efforts to restrict production and lift prices.
By keeping prices higher than they would been otherwise, Saudi Arabia’s strategy of restricting output underpinned the first shale boom (2011-2014) and the second one (2017/2018) in the US.
In 2018, Saudi Arabia continued to restrict output during the first six months, and ultimately raised production by just 400,000 bpd for the full year, compared with a US increase of 2.2-million bpd, according to BP.
By contrast, in 2015/2016, the most recent instance when Saudi Arabia abandoned its price-defence strategy in favour of market share, the kingdom’s output rose by 400,000 bpd while US shale output sank by 433,000 bpd.
In the medium term, the kingdom’s strategy of restricting output to prop up prices is unsustainable; it is conceding too much market share to shale and other non-Opec producers.
Russia, which aided Saudi Arabia’s efforts to restrict supplies in 2017/2018 and again in 2018/2019, has already expressed concern about the long-term consequences of high prices and eroding market share.
In the short term, the kingdom’s policy makers are focused on averting a renewed build up in inventories and slump in prices as global growth and oil demand slows. In the medium term, however, Saudi Arabia will have to moderate its price goals and refocus on market share if it is to maintain its leadership role.