Abduljabbar Zeyad | Reuters
Houthi supporters hold up rifles as they rally to protest the killing of Saleh al-Samad, a senior Houthi official, by a Saudi-led coalition air strike in Hodeidah, Yemen April 25, 2018.
Following the 2014 crash in oil prices, a number of leading market commentators concluded that the era of geopolitics mattering for the oil market was over.
In their view, short-cycle U.S. production was waiting in the wings to fill any supply gap and would swiftly cap any price upside. It was in this context that OPEC’s obituaries once again abounded, with the sovereign producer group seen as resigned to lower for longer (or even lower forever) and too hopelessly divided to return to active market management.
Yet even now, despite the recent run-up in oil prices, this narrative continues to carry considerable currency. The teaser for the panel on energy markets that I am speaking on at the Milken Institute Global Conference, highlights relentless U.S. production offsetting OPEC reductions, renewables disrupting traditional energy markets, and the geopolitical implications of U.S. production growth displacing Russia as the world’s largest oil producer.
Yet we think that there are broader geopolitical factors at play, as geopolitics has returned to the fore for a number of major producer states as well as the oil market generally in 2018. The oil market has tightened significantly in no small part due to the effectiveness of OPEC in draining bloated global inventories as well as the healthy demand outlook.
Against this improving fundamental backdrop, a geopolitically driven supply disruption will now have a much more outsized influence, and price spikes can no longer be dismissed as things of the past. The prolonged period of low prices pushed many stressed producer states to the breaking point, and these casualties of the market share war now are threatening to push the market into an acute deficit situation, putting shale’s superman status to a serious test.
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