On Monday, OPEC released a report predicting the U.S. shale oil boom could be over by the end of 2015, almost declaring the "mission accomplished" in its efforts to battle the US shale oil boom. However, CNN's analysts give us arguments why the cartel should not be in a hurry to proclaim their victory.
Currently, the world is getting too much oil produced, and this caused crude oil prices to meltdown from over $100 a barrel in June 2014 to under $45 now - a six-year low. Someone has to step back and pump less, but the Saudi Arabia-led organization has refused to make cuts in an effort to squeeze American shale producers.
Although, the number of U.S. drilling rigs is declining and significant cuts are being made in big energy's spending plans as evidence the U.S. is caving, OPEC is being too quick to announce victory.
Shale is flexible
Incredible flexibility is one important feature of shale which OPEC is underestimating.
In fact, shale companies can easily stop pumping on completed wells when prices plunge and then quickly return to them. When prices rebound, so should U.S. production, making dips in output short-lived. There is even more to say. Not only are shale producers able to quickly adjust to the changing price, they are becoming much more efficient thanks to technological innovations.
The oil price they need to be profitable is much lower than before. The trend is likely to continue, especially as previously sky-high costs for labor and services decline substantially.
It's also too early to say that U.S. oil output is declining, as data presented by the International Energy Agency last week indicated U.S. oil production shows no signs of slowing.
Unlike OPEC, the International Energy Agency seems to recognize the advantages that shale companies have, thus predicting American oil production will keep growing through 2020.
Who will be the first to retreat?
Saudi Arabia has made it clear it has no desire to balance the market by pumping less oil. The supply glut could be worsened by a potential deal between the West and Iran that would lift sanctions on the country's oil industry.
Tom Kloza, chief oil analyst at the Oil Price Information Service estimated that U.S. oil production should finish this year at around 9.7 million barrels per day. That means 2015 could surpass the previous all-time record of 9.6 million set in 1970.
U.S. oil production could eventually climb to 10 million or 12 million barrels per day, if oil prices get back to the $70 to $90 range, Kloza said.
Assets of shale producers will not disappear
It seems that OPEC is expecting the American shale industry will have to to close up shop if oil stays too low for too long.
Some shale producers will not survive, it's true. But their assests won't disappear. The wells will be acquired by larger energy companies like ExxonMobil (XOM) and Chevron (CVX).
"It's survival of the fittest. The assets will transfer to another oil company with deeper pockets and a greater resilience to lower oil prices," says Fadel Gheit, an Oppenheimer analyst who covers the energy industry.
