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North America’s Capital Markets Replacing OPEC as Oil Supply Arbiter

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The capital markets of North America are replacing OPEC as the central bunker for oil. OPEC is no longer setting the market supply and the responsibility for balancing the oil markets has been borne by North American capital markets that are providing or withdrawing liquidity and shaping oil prices in the process.

After the OPEC meeting last November, market observers who are searching for a production response to lower prices were instead focused on the marginal outputs of Russia, Columbia, the North Sea and the United States. However production was contrary to expectations. Production in key countries held up in spite of depreciating currencies and accommodative tax adjustments. Sanctions that were imposed on Moscow and other Russian companies had no impact; instead the depreciation of the ruble has resulted into a boost in production.

In spite of warnings that Russia’s production will fall by more than 500,000 barrels a day in 2015 and 1m b/d by 2017, it rose to 200,000 b/d and it is expected to continue on rising for the next three to five years. It was also expected that production in Columbia will decline by as much as 200,000 b/d by the year end but instead, lower taxes gave a boost to production.

Those looking for production declines are focused on US shale because currency and tax relief is scarce and there is wide skepticism over the viability of production. However, high costs and high well-level decline rates did not affect production as it has remained robust. Technology and process improvements do not show signs of slowing down and there is a general consensus that significant part of US shale plays an important role in economics and not just on prices that are below $65 per barrel but even those that are below $45 per barrel.

Falling costs are bolstering shale’s position however, even if underlying economies are improving the financial positions of producers are deteriorating rapidly as low prices cascade through the worksheets. Shale is somewhat sensitive to financial stress because it is dependent on capital markets. Since 2010, the upstream sector of the US has to outspend the cash flow it generates so as to create a funding gap that has to filled for the sector to increase production.