Since the great oil price crash of 2014, OPEC has been struggling to get oil prices back up. The fall in oil prices has done immense harm to the Saudi and Russian economies, and Venezuela is even more desperate than those two countries are to get the price of oil back to the historic highs it had enjoyed in the last decade. Some blogs, such as Zero Hedge, had speculated the Saudis had encouraged the oil crash in the hopes of ending the US oil shale revolution.
Recently, OPEC took steps to boost oil prices by cutting production. Unfortunately for OPEC’s plans, as oil prices have risen, US shale has come back online:
Crude has surrendered all of its gains since the Organization of Petroleum Exporting Countries first agreed production cuts in November. While the group has implemented the curbs, a rebound in U.S. shale output and stubbornly-high stockpiles show the world’s three-year crude glut isn’t shifting. Even signals from Saudi Arabia and Russia that they’ll prolong the supply reductions haven’t staunched the rout.
Yet OPEC has limited room for maneuver when it meets on May 25 in Vienna to discuss the deal, and is almost certain to persevere because the alternatives look even worse. If it were to deepen the cutbacks, even more shale supplies might come along to fill the gap, according to UBS Group AG. Abandoning the policy and restoring output would inflict the economic pain of crude below $40, Citigroup Inc. predicts.
“The risk of a higher cut is that it could trigger too strong an increase in prices and support U.S. shale,” said Giovanni Staunovo, an analyst at UBS in Zurich. “If they change strategy, Saudi Arabia would lose face. You can’t say you want lower inventories, and after a few months give up.”
OPEC is in a trap. They can’t cut production because the US will be delighted to fill the gap. And they can’t increase production because that will just trigger a “race to the bottom.” The market currently is glutted with oil as well, leaving them no room to maneuver. It appears at least for the immediate future, oil will be cheap and plentiful. The glory days of OPEC are now behind it.