While OPEC’s fight to snatch market share from rival oil producers might look like a costly failure as prices languish below US$50 a barrel, an entirely different picture could emerge next year.
Supplies outside OPEC are expected to contract next year for the first time since 2008, sliding by 200,000 barrels a day, according to the International Energy Agency.
With consumption set to grow by 1.4 million barrels a day, OPEC and its de facto leader, Saudi Arabia, could seize the chance to broaden their market as competitors damaged by the price slump fall off.
“To declare their policy a failure is a pretty big leap,” said Greg Sharenow, who manages US$15 billion as executive vice president of Pacific Investment Management Co. “I don’t think you could view Saudi and OPEC’s business plan and model as being a six or 12-month view. In the long run, what you’re going to see is lower non-OPEC supply, higher demand and greater market share for them.”
OPEC in November last year diverged from its traditional policy of adjusting supply to manage prices, announcing it would maintain output to defend its position in the market. That decision has been tested by the collapse in crude, which has since dropped more than 40 percent amid a global supply glut.
OPEC’s share of the world oil market dwindled to the lowest in a decade last year as surging output from US shale wells eclipsed gains in fuel demand.
Yet the steep slide in Brent, which traded near US$47 yesterday after recovering to more than US$60 in May, could prove beneficial to the 12-member group as higher-cost competitors struggle.
“The worst thing for the Saudi strategy was when prices rallied to US$60 and looked like they’d stay there, because other producers can learn to live with it,” said Paul Horsnell, head of commodities research at Standard Chartered PLC. “For that strategy to work, it needed a further severe downward correction in prices.”
Many US shale companies are burdened by the borrowings that fueled the industry’s boom. Interest payments on the US$235 billion debt of drillers in the Bloomberg Intelligence North America Independent Explorers & Producers Index may thin out some companies even after others found ways to cut costs and boost efficiency. The longer the crude price flags, the greater the pressure on shale producers to retrench.
Such cuts at competitors may be little consolation to OPEC’s most vulnerable members. The weakest — the “Fragile Five” of Algeria, Iraq, Libya, Nigeria and Venezuela — have had to slash social spending following the drop in prices and face increasing risk of political unrest, according to RBC Capital Markets LLC.
Even OPEC’s biggest member is not immune to the pain. The Saudi government is seeking to cut billions of dollars from next year’s budget after running the biggest deficit since 1987 this year, according to two people familiar with the matter.
Meanwhile Iran, once OPEC’s No. 2 producer, is set to swell global oil supply further by raising output once sanctions against the country are lifted.
“If Iran gets its opening right — which is a big if — then it has the capacity to really ramp up production just when the market would otherwise be tightening,” said Seth Kleinman, head of energy strategy at Citigroup Inc in London.
Yet for all the flaws of OPEC’s plan, the alternative approach of reducing production may have turned out worse.
By cutting back, Saudi Arabia would have ceded market share and lost revenue in the long-run while the resulting price support would have spurred US shale output, inflating the surplus, according to Societe Generale SA.
“This has always been a long game measured in years, not months,” Mike Wittner, head of oil-market research at Societe Generale in New York, said by e-mail. “They just need to be patient.”
Oil futures yesterday declined after a 10 percent rally on Thursday that was the biggest in more than six years. West Texas Intermediate for October delivery fell as much as US$0.78 to US$41.78 a barrel on the New York Mercantile Exchange and was at US$42.08 at 9:56am in London.
Brent for October settlement lost as much as US$0.95, or 2 percent, to US$46.61 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of US$4.92 to WTI, compared with US$5.01 on Friday last week.
Among the rows of vibrators, rubber torsos and leather harnesses at a Chinese sex toys exhibition in Shanghai this weekend, the beginnings of an artificial intelligence (AI)-driven shift in the industry quietly pulsed. China manufactures about 70 percent of the world’s sex toys, most of it the “hardware” on display at the fair — whether that be technicolor tentacled dildos or hyper-realistic personalized silicone dolls. Yet smart toys have been rising in popularity for some time. Many major European and US brands already offer tech-enhanced products that can enable long-distance love, monitor well-being and even bring people one step closer to
Malaysia’s leader yesterday announced plans to build a massive semiconductor design park, aiming to boost the Southeast Asian nation’s role in the global chip industry. A prominent player in the semiconductor industry for decades, Malaysia accounts for an estimated 13 percent of global back-end manufacturing, according to German tech giant Bosch. Now it wants to go beyond production and emerge as a chip design powerhouse too, Malaysian Prime Minister Anwar Ibrahim said. “I am pleased to announce the largest IC (integrated circuit) Design Park in Southeast Asia, that will house world-class anchor tenants and collaborate with global companies such as Arm [Holdings PLC],”
TRANSFORMATION: Taiwan is now home to the largest Google hardware research and development center outside of the US, thanks to the nation’s economic policies President Tsai Ing-wen (蔡英文) yesterday attended an event marking the opening of Google’s second hardware research and development (R&D) office in Taiwan, which was held at New Taipei City’s Banciao District (板橋). This signals Taiwan’s transformation into the world’s largest Google hardware research and development center outside of the US, validating the nation’s economic policy in the past eight years, she said. The “five plus two” innovative industries policy, “six core strategic industries” initiative and infrastructure projects have grown the national industry and established resilient supply chains that withstood the COVID-19 pandemic, Tsai said. Taiwan has improved investment conditions of the domestic economy
MAJOR BENEFICIARY: The company benefits from TSMC’s advanced packaging scarcity, given robust demand for Nvidia AI chips, analysts said ASE Technology Holding Co (ASE, 日月光投控), the world’s biggest chip packaging and testing service provider, yesterday said it is raising its equipment capital expenditure budget by 10 percent this year to expand leading-edge and advanced packing and testing capacity amid strong artificial intelligence (AI) and high-performance computing chip demand. This is on top of the 40 to 50 percent annual increase in its capital spending budget to more than the US$1.7 billion to announced in February. About half of the equipment capital expenditure would be spent on leading-edge and advanced packaging and testing technology, the company said. ASE is considered by analysts