A game of cat and mouse between OPEC and US shale producers: Who will

win and why?

The price of oil fell from 115$/bbl in June
2014 to $45/bbl in January 2015 but of
late, it has stabilized at around 60$/bbl
level. The decline in price of oil is mainly
on account of overload of oil supply due to
US shale boom (around 4mb/d extra) and
a weak demand on account of slowdown
of Chinas manufacturing sector and
troubles in the Eurozone. The result is an
extra supply of 2mb/d of oil as seen in
below figure.

A
nother important factor in dramatic fall of
oil prices is OPECs unwillingness to cut
down their production levels. Historically,
OPEC (40% of total production) has
reduced their production levels to
maintain oil prices by balancing supplydemand equation. Some OPEC countries
like Iran and Venezuela need oil prices in
excess of 100$/bbl to balance their
budgets(as seen in below figure) but
OPEC, Saudi Arabia in particular have
refused to cut down their production in
order to preserve their market share.

OPECs rationale behind maintaining their

production quota is commercial unviability
of shale oil at lower oil price levels.
Advanced Technologies like Horizontal
Drilling followed by Hydraulic
Fracturing are required for Shale Oil
Production, which leads to higher capital
costs. Moreover, shale oil production
requires huge volume of water, sand and
chemical which increases the operational
cost. There are different estimates for
breakeven cost of Shale oil production but
even the most optimistic estimate of 4050$/bbl is much higher compared to 1020$/bbl for conventional oil production.
The cost of producing oil for Saudi Arabia
and other OPEC members is even lower.
OPEC crude supply for Q2 2015, rose to
31.7 mb/d, a three-year high, led by
record high output from Iraq, Saudi Arabia
and the UAE while U.S has lost about 3%
of oil production from its shale formations
in the same quarter and this is just the
start as lifting of sanctions from Iran will
increase the supply of oil, which in turn
would lead to further reduction of oil
prices.