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Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi. (HASSAN AMMAR/ASSOCIATED PRESS)
Saudi Minister of Petroleum and Mineral Resources Ali Al-Naimi. (HASSAN AMMAR/ASSOCIATED PRESS)

OPEC’s slipping grasp on the world’s oil market Add to ...

“They are not at a pivot point yet, but there are clear challenges ahead,” said Daniel Yergin, vice-chairman of IHS Inc. and a leading consultant on the global oil industry.

“There are geopolitical challenges – regional challenges that come with the stand-off over Iran’s nuclear program and the concerns Arab Gulf states have over it, and the Syrian conflict, which has elements of being a proxy war among countries that are key members of OPEC.

“And there is the buildup of supply coming from North America – in particular this dramatic increase, this surge, in U.S. oil production – and also the potential recovery of Iraq, [which is] very keen to make up for lost time.”

As recently as last year, OPEC members dismissed booming U.S. shale oil production as a flash in the pan. The formation of a study group to pore over the impacts shows the that thinking has changed.

It is no wonder. In its May Medium-Term Oil Market Report, the International Energy Agency referred to growth in U.S. light oil, along with the Canadian oil sands, as a “supply shock” that will be “as transformative to the market over the next five years as was the rise of Chinese demand over the last 15.”

Driven by the boom in oil production from regions such as the North Dakota Bakken and Eagle Ford in Texas, the United States is now on track to be the world’s largest oil producer in the next decade, according to some forecasts.

The IEA, the West’s energy watchdog, has predicted the United States will pump 11.1 million barrels a day by 2020, up from nearly seven million in 2012 and surpassing Saudi Arabia in the process. North Dakota production has more than doubled in two years to nearly 800,000 barrels a day. Already, after decades of promises, the shale revolution is helping the U.S. finally shake its “unhealthy addiction” to imported oil, as former president George W. Bush called it.

That alone will not strip OPEC of its overall market power. But cartel members such as Nigeria and Algeria that are known for producing light sweet crude – the easily flowing supplies that are low in sulphur content and simple to refine – are feeling the pinch.

U.S. imports from Nigeria were more than halved to 403,000 barrels a day in March, 2013, from 913,000 in March, 2011, according to the U.S. Energy Information Administration. Nigeria, Algeria and others have redirected exports to Asia and other markets amid expectations that the U.S. will eventually require no such supplies, said Michael Wittner, managing director and head of commodities research for Société Générale SA’s Americas operations.

“Is OPEC relevant? As long as the shale oil is a North American thing, yes. That’s something I would say will hold for maybe a five-year time horizon.,” Mr. Wittner said. “Out beyond that, the question becomes much more complicated.”

He points out that other countries, including Russia, China, Australia and Argentina, may have large shale oil reserves that could one day mean stiff new competition for the OPEC producers.

“As we move into unconventionals, OPEC is no longer going to hold all the cards,” said Thomas Pyle, president of the Institute for Energy Research in Washington.

Many in the U.S. see Canada and the proposal to build the Keystone XL pipeline to get increasing volumes of Alberta bitumen to the U.S. Gulf Coast as an important move in the geopolitical game.

“If the U.S. government got its act together and approved the Keystone pipeline, it would forge us a lasting relationship with Canada that would shift global energy power quite significantly,” Mr. Pyle said.

An immediate concern for OPEC due to falling light oil exports to the U.S. is increased competition with other crudes such as those from the North Sea and Russia, said Judith Dwarkin, director of research at ITG Investment Research.

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