Crude oil war yields unexpected casualties
OPEC’s war on American shale oil producers has caused casualties in unexpected quarters - the deep sea producers and projects around the world.
OPEC had thought that by continuing high levels of production, the resulting drop in crude oil prices would force shale oil producers out of the market. The assumption was that those unconventional wells needed prices at or above $100 per barrel in order to stay in the black. That assumption has proved false, but it is true for the more exotic and complex projects that big oil companies have undertaken. The big companies have already stated that they are re-assessing projects and capital deployment plans, while at the same time focusing on cost reductions in their operations.
Meantime, shale oil production continues to grow. In June 2012, when the shale oil boom was just getting started, the U.S. was pumping 6.2 million barrels a day. Now, it produces 9.5 million barrels a day, the highest since 1972. The USA now produces more crude oil than the
United Arab Emirates, OPEC’s third-largest producer behind Saudi Arabia and Iraq. The CEO of Conoco Philips, Mr Ryan Lance, told the OPEC meeting last week “Shale oil is here to stay.”
Crude oil supply looks set to remain strong. At last week’s OPEC meeting in Vienna, the cartel decided to retain production levels at present levels. With Iran now likely to re-enter the mainstream market, and with shale oil production continuing to grow, albeit at slower rates, the downward pressure on crude oil prices looks set to increase.
Big oil companies have deep pockets and will look for alternative investment opportunities, but some of the support industries, such as those that service and maintain the big deep sea rigs or those that build new deep sea rigs, are going to struggle.
These developments in the crude oil industry will likely have a profound influence on the global aluminium industry. It’s not just because of the indirect tie between aluminium prices and energy prices - crude oil prices have been lower than today’s average, as well as higher - but because of the increased presence of shale oil in the total supply equation, especially in the areas where the industry draws its carbon supplies from. If shale oil is here to stay, as Mr Lance says, then so too is the change in refinery blends, and the resulting reduction in volume and quality of petcoke.
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