The Chinese calendar defined 2014 as the year of the horse, but 2014 was certainly the year of oil in the commodity complex. Everything in the energy complex, including natural gas, ended 2014 with double digit losses greater than 30% (see “Buyers’ market,” below).
Success in the exploration and production sector in the U.S. energy industry translated to defeat insofar as the price of oil and natural gas was concerned. U.S. crude oil production hit the highest level since the Energy Information Administration (EIA) has been publishing data (1983). The Organization of the Pertroleum Exporting Countries (OPEC), Saudi Arabia in particular, was looking at a diminishing global market share much as they did back in the 1980s when North Sea and Alaskan crudes were coming on stream. This time it is the U.S. shale revolution that has changed the global supply and demand balances for crude oil.
Why is Saudi Arabia, and OPEC in general, concerned and why are they embroiled in a market share war with non-OPEC producers? For starters, for the week ending Dec. 26, 2014, U.S. crude oil production stood at 9.121 million barrels-per-day (BPD) or 1 million above where it ended in 2013. In addition, total U.S. imports of crude oil declined about 435,000 barrels per day (bpd) across the year, but this number is even larger when Canadian imports are excluded; about 645,000 bpd. The reduction in imports is simply crude oil that is now trying to find a home in the international markets or in OPEC’s prime territory.
In addition to the above, the United States is now a major exporter of refined products and crude oil. The latest data released by the EIA showed the U.S. exported a total of 3.759 million bpd, of which 388,000 bpd was crude oil and 3.371 million bpd was refined products. Not only is the United States’ need for OPEC crude oil continuing to diminish, the United States also is now one of the largest exporters of oil in the world. Bottom line, the world was more than well supplied with oil in 2014 and based on all of the projections it will remain well supplied through most of 2015.
OPEC is currently scrambling as an organization, having decided at their October meeting to keep production at the same level it has been for most of the past year and focus on maintaining market share rather than defending a price level as it has for many years. The result is all of the 12 OPEC countries are in the process of drastically cutting their 2015 budgets and social programs with the impact yet to be determined as many of these same countries are relatively unstable and have fragile governments.
There are already some negative comments coming from various OPEC members (like Iran, Venezuela and Algeria), who fall into the category of countries that do not have a sufficient cash surplus to weather the low price storm for an extended period of time as do Saudi Arabia and other Arabian Gulf producers. In the United States, many producers have hedged at least a portion of their production through the first half of 2015 and possibly longer, suggesting that OPEC’s target, U.S. shale operators, may be able to weather the storm much longer than OPEC countries and much longer than OPEC is hoping for.