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364410
Tue, 04/21/2015 - 13:54
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Frank Umbach: Situation of world oil market underestimated

Baku, Azerbaijan, April 21 By Aygun Badalova - Trend: The situation of the rapidly changing world oil market had been underestimated, Frank Umbach, Research Director at the European Centre for Energy and Resource Security (EUCERS) believes. In an interview with Trend, Umbach said that there are several factors affecting the current oil prices dynamic. Firstly, he believes, Saudi Arabia did not act last autumn as the world’s traditional swing producer by persuading its OPEC member states to cut the cartel’s oil production in order to stabilize the world crude oil prices at around $100. “Saudi Arabia officially insisted that its new oil policy is not intended to be a “war on shale”, it stressed in March that it was not the role of Middle East countries and OPEC to “subsidise higher-cost producers by ceding market share,” he said. Secondly, according to Umbach, when OPEC did not decrease its oil production, almost nobody had foreseen that the world oil prices would further fall to under $50 per barrel. “Saudi Arabia, like everyone else, had underestimated the situation of the rapidly changing world oil market due to a combination and interplay of several rapidly changing market conditions, accompanied by unrealistic expectations until last autumn and the appreciation of the US dollar,” he said. Currently prices are being traded at the level around $60 per barrel compared to the level of more than $100 per barrel in 2011-2013. At OPEC's 166th meeting in Vienna on Nov. 27, the member countries decided to keep oil production quota unchanged at the level of 30 million barrels per day. Nigeria, Iran, Venezuela and Libya have been pushing for the Cartel to cut output in a bid to reverse more than 50-percent drop in prices since June last year. The next official meeting is scheduled for June 5. Talking about the impact of U.S. oil production on oil prices, Umbach stressed that the U.S. oil productivity improvements are one of the most impressive one ever achieved by any industry. He said that since 2008, US crude oil output increased by 80 percent (+4 million barrels per day) – far more than the combined production increases by all other oil producers in the world. Thanks to the U.S. shale oil production, its oil imports have constantly declined to just 3 million barrels per day in comparison with its 2006 peak of 10 million barrels per day. “Although the number of operation rigs fell by 761 ones to just 1,048 rigs until the end of 2014, the US shale oil bonanza has just slowed, but it continued to rise from 8.5 million barrels per day in 2014 to 9.36 million barrels per day in 2015 – as forecasted by the revised forecast of the U.S. Energy Information Administration (EIA). During the last three years, productivity and efficiency have increased by 25 percent with longer laterals, targeted fracturing stages as well as reducing maintenance and repairs, which are slicing costs and boosting output. The profitability of $100 per barrel three years ago is the same like the one of $75 today,” Umbach said. In comparison with traditional US and other conventional oil producers, US shale oil producers are able to adopt to changing market situations and signals far more quickly, which allows the U.S. to function as a “massive storage depot” with an ability to respond with unprecedented speed to volatile global commodity market, Umbach believes. “The U.S. shale gas industry’s ability to maintain its production output depends on the factor how far it can further reduce its costs. The sheer diversity of US shale oil and gas producers make any assessments and forecasts about the impact of the falling oil prices on their shale projects, their break-even price and the companies’ strategies difficult to generalize,” he said. “In the meantime and the years ahead, the US shale oil industry then will further strengthen its ever-increasing production efficiency and improved technologies, which then will further decrease its break-even price rate. In this view, the U.S. break-even price for its shale oil projects has become a “moving target” instead of a fixed one,” Umbach added. Despite the fact that the oil price has risen again to more than US$60 per barrel, Umbach said, the average cost of a single US shale well is expected to decline further by another 40 percent in the next years just due to better management of factors such as planning, logistics, and relationships with suppliers. In this light, some of the U.S. oil economists have already forecasted that the drop in oil prices and demand as well as heightened oil production in North America may last not just for the next couple of months, but even for many years and even decades, declining the role and power of the OPEC cartel, he added. --- Follow the author on Twitter: @AygunBadalova Follow us on Twitter @TRENDNewsAgency

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