OPEC+ targets US shale again with output increases

Saudi Arabia and Russia, the group's leaders, are also pushing a secondary objective behind OPEC+’s plan to increase oil production and punish overproducing allies: taking on U.S. shale to win back market shares from the United States.

OPEC’s last price war against U.S. producers ten years ago failed, as technological and drilling breakthroughs allowed U.S. shale firms to cut costs, lower prices, and take market share away from the 12-member groups in the years that followed.

The U.S. is more susceptible to price wars now. In the last three years, costs have risen for U.S. shale oil producers. The decline in global oil prices is also affecting their income.

Saudi Arabia and Russia briefed 10 OPEC+ delegates on their production strategies.

Four of the ten sources said that regaining some market share was one reason for the decision made on May 3, to increase production more quickly than originally planned. However, none of them claimed the strategy represented a price battle.

Sources who declined to identify themselves due to the sensitive nature of the issue said that OPEC+ must lower oil prices from their current level of $65 per barrel down to $55-60.

One industry source who was briefed about Saudi Arabia's thinking said, "The idea is that prices below $60 per barrel will create a lot more uncertainty in the plans of others."

Requests for comments were not responded to by the Saudi government's communications office, Alexander Novak's office in Russia or OPEC.

OPEC+ - which includes OPEC and other producers like Russia and Kazakhstan - cited the "current healthy market fundamentals as reflected by the low oil inventory" as the reason for its production decision.

OPEC+'s output increases come at a time when the Permian oilfield in the United States, which is the largest, has been depleted of its best-quality shale. Production costs rise as producers shift to secondary areas. Costs have increased due to inflation.

According to a survey conducted by the Dallas Federal Reserve in the first quarter of this year, over 100 oil companies from Texas, New Mexico, and Louisiana were surveyed.

Analysts estimate that Saudi Arabia's production costs are between $3 and $5 per barrel, while Russia's is between $10 and $20.

Last Producer Standing

At its height, OPEC accounted for more than half of the global oil production. According to OPEC, this dominance is eroding. It has fallen from a market share of 40% a decade earlier to less than 25% this year. The United States share increased from 14% up to 20%.

OPEC+, together with non-OPEC partners, produces around 48% of the world's oil.

OPEC+ has increased production after cutting production in the past five years by up to 5.85 million barrels a day - or 5% global demand – to balance the market as U.S. shale production grew.

One of the OPEC+ source said, "It's time to regain lost market share."

Saudi Arabia claims that its low production cost will make it the last producer to compete in any market.

Sources said that Moscow is gradually embracing the Saudi strategy of pumping more oil in order to punish OPEC+ countries such as Iraq and Kazakhstan, for their overproduction, and to put other producers under pressure, including shale-oil producers.

A high-level Russian said that the main cause of the oil market's imbalance is due to U.S. shale development.

Sources said that a price of less than $60 per barrel, the G7 price limit imposed due to the Ukraine conflict on Russian oil, would allow for easier exports and could be beneficial to Moscow.

EVERYBODY HURTS

Brent oil, the global benchmark, dropped to a 4-year low in April, near $58 a barrel, on the back of OPEC+'s output increases and concerns about the world economy.

Linhua Guan is the CEO of Surge Energy America. It is one of the biggest private U.S. crude oil producers with operations in Permian Basin.

He said that the U.S. production of oil was likely to drop this year due to the drilling out of top-quality inventory. Guan said that the U.S. Administration's tariff policy and the volatile market has contributed to the expected bankruptcies in the oil industry.

He said that "OPEC+'s increased production is stealing market share away from U.S. shale oil producers."

Baker Hughes reported that the U.S. oil rig count dropped to its lowest level since January earlier this month.

Diamondback Energy, a shale firm, lowered its production forecast for 2025 in the first week of this month. It said that rising OPEC+ supplies and global economic uncertainty have pushed U.S. crude oil production to a critical point.

ConocoPhillips warned that the price of a barrel at $50 could lead to widespread activity reductions among large players.

Price wars are a major problem for everyone.

Oil companies are under pressure to reduce capital expenditures, dividends and jobs, but lower oil prices place countries who rely on oil revenue under fiscal stress.

According to the International Monetary Fund, Russia requires oil prices over $77 per barrel to balance its budget. Saudi Arabia's figure is more than $90 per barrel.

OPEC+ doesn't have a price target in writing, but its officials regularly exchange views on the price levels of oil and their implications for the industry as well as the global economy.

Saudi officials told industry experts and allies that they are prepared to endure some pain. They said a price of $60 per barrel is acceptable, even if the country has to borrow to balance its budget.

(source: Reuters)