How much oil to pump? Oil pump jacks in the desert of Bahrain, Middle East. Photo courtesy of Adobe Stock.
Lots of articles lately describing what is going on in the oil market. If you are a consumer, the news is rather good. If you are a part of OPEC, the news is quite grim. If you are a U.S. producer, there is a lot of opportunity.
5/17/17 – Daniel Yergin at Wall Street Journal – The Struggle Behind Oil’s Ups and Downs – Another must read, but then anything Mr. Yergin writes is in that category.
Here is my feeble try at a summary:
Mr. Yergin sees two forces at play in the oil market.
First is the pressure to balance supply and demand. US shale producers increased production a lot in 2014 which created an imbalance in the supply, which pushed prices down. Instead of dropping production to maintain prices, Saudi Arabia increased production, which further oversupplied the market and caused prices to collapse.
When prices dropped further than expected, the Saudis worked out a deal to cut production last November. That brought prices up.
In turn, that motivated shale producers to increase drilling, which is increasing US production, which will put more US shale oil on the market than expected, which will put substantial downward pressure on prices later this year.
Second is the recalibration of technology and internal pricing to reduce the cost of production. The innovation and efficiency gains in the last two years are remarkable.