US influence is diminishing

Between 2014 and 2018, US shale was the driving force pulling oil prices down. However, the US shale boom was driven by easy credit, which has ceased. Also, most of the potential shale sources have been exploited and the ability of the US to control supplies is not a reality now. The US may have been the swing oil producer for a brief period, but now with the alliance between Russia and OPEC, the swing has shifted back. 

OPEC is now calling the shots

OPEC’s share of output may have fallen to below 40% of global output, but it accounts for over 60% of oil exports. That is because most of US oil is used internally. Above all, OPEC controls more than 80% of the world oil reserves with the predominant reserves existing in Saudi Arabia and Venezuela. Add to this the fact that now Russia, Mexico and Kazakhstan are part of the OPEC Plus alliance, and it gives a lot more of bargaining power to the OPEC. When it comes to supply of oil, it is still OPEC that is calling the shorts and restraints on supply placed by the OPEC has been the reason for robust crude oil prices. 

Demand will trend higher

Currently, the global oil market is under-supplied by about 2-3 million bpd. This equation could change rapidly if the OPEC increases the supply or if the US boosts shale production or if the Iran deal happens. Neither of these are likely to happen. More often than not, oil is a consensus between the largest drillers. Today, crude is close to $100/bbl and nobody is really complaining. Most oil consumers created reserves when prices were low, so they can afford high crude prices for some more time. India has a problem for a different reason. Demand disruption caused by COVID is history and unlikely to happen again in the near future. In short, it is the producers who are again setting the oil price for now. 

What about renewable risk?

Green energy does pose a long term risk to crude oil demand, but as of now it is not a show stopper. When it comes to lower oil demand, we are talking about the next 25-30 years. During this period, overall oil demand may not increase but neither will supply. That means; for a number of years from now, you would still find oil demand higher than oil supply and prices of oil staying robust. The big risk will be that suppliers are now likely to coordinate supplies better so as to keep prices in a range. In the absence of any collapse in demand for oil, the oil producers will continue to drive the oil prices, at least for now!