OPEC and its allies, collectively known as OPEC+, have significantly reduced their market share to a historic low by implementing production cuts to stabilize prices. This development presents a favorable opportunity for producers outside the alliance, particularly U.S. major players. With OPEC taking steps to prevent oversupply in the market, non-OPEC producers now have the freedom to increase drilling activities and enjoy the benefits.
Market Share Analysis
According to projections by Rystad Energy, the recent production-cut decisions made by OPEC+ will bring their share of oil production down to 33.9% in June, a considerable decline from 41.4% in April 2020 when OPEC was engaged in a market-share dispute. Despite significant production reductions during the height of the Covid-19 pandemic, OPEC+ maintained a market share of approximately 35% up until May 2020. This reduction in market share comes at a time when producers outside the alliance are also scaling back their production levels.
Price Outlook
OPEC+ remains committed to keeping oil prices elevated, especially as non-alliance producers continue to ramp up production amidst relatively weak demand. Analysts at Rystad Energy have revised their second-quarter price estimates for Brent crude to $85 per barrel, up from $80. Moreover, they anticipate an average oil price of $85 throughout the entire year. As of Wednesday, the international benchmark Brent crude was trading at $83.20 per barrel, reflecting a 1.4% increase for the day.
The Rise of OPEC+
OPEC+ came into existence in 2016 when OPEC joined forces with Russia and other state-directed oil-producing nations in a bid to expand their influence over the market. Their efforts have paid off, keeping oil prices at elevated levels in the aftermath of the Covid pandemic. However, this success has come at a price – a sacrifice in market share. The United States currently holds the title of the world’s largest oil producer, churning out a staggering 13.3 million barrels daily. Similarly, countries like Brazil have been ramping up their production levels.
Sacrifices by Saudi Arabia
Significantly, Saudi Arabia has borne a considerable burden of the OPEC cuts. Despite possessing the second-largest oil reserves worldwide, trailing only Venezuela, and boasting minimal production costs, the country has dialed back its output to a mere 9 million barrels per day, well below its capacity of 12 million. This reduction has strained the unity of the alliance, with Angola exiting last year due to frustrations over production constraints. Nonetheless, many experts believe that the remaining members will remain united despite relinquishing market share.
The Future of OPEC+
Amidst speculation about potential market share conflicts and further defections, RBC Capital Markets analyst Helima Croft remains optimistic about the group’s cohesion. According to Croft, there are no signs pointing towards a resurgence of a market-share battle or another member following Angola’s departure. On the contrary, recent observations suggest that the cartel is more unified than ever before, dispelling doubts about its strength moving forward.
The Bright Future for Independent Oil Producers
Independent oil producers can look forward to a promising future, with many companies gearing up to increase their oil production. Industry giants like Exxon Mobil and Chevron are already executing multiyear growth strategies. With OPEC maintaining high prices, a major obstacle has been removed, further fueling the optimism in the sector.