Advantage shale vis-à-vis crude oil for now

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By Soma Banerjee @somaet
Executive Director – Energy & Infrastructure, CII

Oil producers in West Asia and some non-OPEC countries who had begun recovering some of their lost fortunes since June 2017 as crude oil prices moved northwards steadily, may need to rework their strategies if the latest IEA estimates are anything to go by.

In just three months to November, US crude output increased by a colossal 846 kb/d, and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader. All the indicators that suggest continued fast growth in the US are in perfect alignment; rising prices leading, after a few months, to more drilling, more completions, more production, and more hedging.

But the game has just begun, because this is not one of simple demand and supply. This is more about strategy and geopolitics. A high and steady increase in crude prices is almost a must for Saudi Arabia which has decided to divest 5% of its crown jewel Saudi Aramco, the national oil company. Billed to be the biggest globally, this IPO is set to rake in $100 billion for the oil nation at a given valuation of $2 trillion, according to media reports. Any change in crude pricing estimates or assumptions could affect the calculations for this IPO. What’s more, Russia and China are also hoping to take a plunge in this mega-IPO.

India, which is on a tightrope walk, will hope for US shale to change the tide, as high crude prices will adversely impact the current account deficit and fiscal deficit it needs to hold on to.

The IEA says the situation in early-2018 is reminiscent of the first wave of US shale growth that, riding the tide of high oil prices in the early years of this decade, made big gains in terms of market share, and eventually in 2014 forced a historic change of policy by leading producers.

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The question today is what strategy leading oil producers will take now. The world today is different from 2014 in many ways. While it is more fractured geo-politically, with volatile political risks embedded in every bilateral relation, dependencies of some nations that are not so well-endowed with resources have only increased due to the galloping demand. The stakes involved in the shale versus crude oil battle are far greater in 2018, and so are the risks.

For one, Russia and some non-OPEC countries aligning to cut supplies and thus push up prices have led to a steady uptick in oil prices, which has impacted the economic math of countries like India, which imports close to 80% of its energy requirement, while US producers have begun pumping up their volumes, contributing significantly to the global inventory mix.

The first signs of the sobering effect has shown up on global crude oil price indices, and the punters are reassessing their positions.