Oil prices are rising, but new production could threaten volatile prices
Rabat – Oil prices hit an 11-month high as prices settled near $57 per barrel on Tuesday, yet the UAE is warning not to take the increase for granted. As the global economy slowly recovers and demand for oil is increasing, oil prices are again rising. However, rising optimism on COVID-19 vaccines and growing demand could be threatened by increasing production.
After a difficult year for countries that depend on oil revenues many capitals in the Middle East will be relieved to see oil prices rise again. Painful production cuts helped alleviate a glut in oil that saw storage facilities fill amid weak demand.
Members of the Organization of the Petroleum Exporting Countries (OPEC) made significant sacrifices to help stabilize oil prices, committing to production cuts amid budget issues and economic crises at home. Saudi Arabia is leading by example by continuing its production cuts, yet the UAE fears that US shale producers could threaten the progress made.
2020 was a difficult year for OPEC, but a disastrous one for small-scale US shale gas producers. Shale gas has been an environmentally controversial yet abundant source of fossil fuels that sparked a decade-long boom in US energy production.
That boom collapsed in 2020, as debt-ridden US shale producers were unable to remain profitable amid falling oil prices. Now, the International Energy Agency, which is primarily financed by the US and Japan, has announced that it is once again profitable to extract shale gas.
The possible return to shale gas extraction prompted Emirati Energy Minister Suhail Al Mazrouei to issue a warning to US shale gas producers. The minister warned that shale gas producers be “wise not to jump the gun and overproduce during the recovery year.” After OPEC and Russia’s painful cuts, he fears the US could again flood markets with oil.
Shale gas extraction requires constant pressure on wells, making production hard to reduce once started. If shale gas producers would ramp up production and prices would again fall, they would struggle to survive selling their product at a loss.
Such a situation occurred in April of 2020, when oil prices fell below $0, meaning that owners of oil futures were paying to get rid of the oil they were holding. With oil prices again above $55, such a collapse seems like a distant memory, yet overproduction mixed with poor economic indications could again produce such a scenario.
US shale producers “need to be careful not to flood the market,” Al Mazrouei warned. For Gulf countries and Russia, their sacrifice could be for nigh, if the US once again ramps up production while prices are still volatile and uncertainty remains.