It seems as though OPEC's efforts to raise oil prices and conquer the three-year old commodity glut keep getting trumped as rival corporations rapidly try to tap shale reserves in the United States.
Considering that the summer driving season for oil is imminent, it is only logical to assume that oil and natural gas prices will increase. Yet, they seem to continue to fall due to inventories of crude and refined oil remaining obdurately high in the United States and abroad.
In the past three weeks, since OPEC, Russia and other producers agreed to extend oil supply cuts for another nine months in order to raise prices, the price of Brent crude has fallen 13% and is set to finish this week at the lowest level this year, near $47 a barrel.
The countries involved in the deal collectively represent more than 50% of global oil output and have cut as much as 1.8m barrels a day of supplies from the market. However, their efforts have been rendered futile as oil stockpiles amassed during the glut are being drawn from storage whilst demand, traders believe, has not grown as quickly as people expected.
"In Opec's minds, they have made the cuts and the market should be patient while stocks come down," said Gary Ross, head of oil at Pira Energy Group, a unit of S&P Global Platts.
The International Energy Agency this week said supplies from countries outside OPEC, with US acting as the spearhead, would grow faster than demand next year, implying that the glut of oil stocks is unlikely to disintegrate in 2018 without external OPEC control or manipulation.
At least 123 of the companies operating in the U.S have filed for bankruptcy since early 2015, and the survivors, such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), have experienced slumping share prices considerably below bull market averages as they borrow to keep up their dividends. More than 150,000 oil workers lost their jobs in America alone. It is ironic that the very companies that continue to enter the market and are not able to produce sufficient short term profits are the very ones perpetuating their own downfall.
The problem also stems from American producer's resilience to this hardship which continues to keep too many companies in the game. They manufactured oil at reduced costs through drilling longer lateral wells in shale fields and installed newer, more efficient technologies entailing a higher degree of mechanization with sensor features.
While OPEC's move did engender an extremely temporary raise in oil prices to over $50 a barrel early in 2017, this was just an illusion: in reality, its production increased by 290,000 barrels a day in May, which was the highest level of the year, because Libya and Nigeria were spared from the cuts and poured crude onto world markets as a consequence.
"It remains to be seen if drilling can continue at the same pace in a sub-$50 environment once price hedges expire," Mr. Jafar said, referring to the American shale producers. "But if it does, I believe OPEC producers will have no choice but to revert to preservation of market share once again, which could see prices nose-dive. And the cycle will continue."