As oil prices tank, new era of abundance seen dawning

As oil production swells, demand falters and prices slide, the global oil market appears on the verge of a pivotal shift from an era of scarcity to one of abundance.

Oil prices have fallen as much as 20 percent since June, despite a host of rising supply risks, leading more investors and traders to consider whether 2015 is the year in which the U.S. shale oil boom finally tips the world into surplus.

While the plunge has rekindled speculation that the Organization of the Petroleum Exporting Countries (OPEC) may need to cut output for the first time in six years when it meets next month, some analysts are looking much further ahead.

They say a long-anticipated fundamental shift in the market may now be under way, ending a four-year stretch when $100-plus prices were the norm, and opening a new era in which OPEC restraint once again becomes paramount.

The signs are everywhere: U.S. oil imports are shrinking much faster than expected while oil production climbs to a thirty-year high. Chinese economic growth, and therefore oil demand growth, is slowing. Even output in trouble spots like Libya and Iraq is rising after years of insurrection-led losses.

What is happening in oil markets "finally represent the rebalancing and the impact of this tremendous surge in U.S. oil production," says Daniel Yergin, Vice Chairman of IHS and one of the world's foremost oil historians.

The fact that oil prices are falling despite continued turmoil in much of the Middle East and sanctions on Russia "is a milestone, a marker of change."

Some analysts say it is too early to tell if the latest fall in prices is any different from previous declines, such as in 2012 and 2013, when events such as civil war in Libya and sanctions on Iran spurred sharp rebounds.

A spurt in economic growth in Europe or another supply disruption could again push prices higher in the short term, but risks appear increasingly skewed lower.

Last week analysts at Credit Suisse cut their 2016 Brent oil price forecast to $93 a barrel, the second-lowest among analysts polled by Reuters. The consensus OILPOLL for that year was over $101 a barrel. The bank pegged 2017 at $88 a barrel as North American output growth "overwhelms" global demand.

Some oil traders agree. Long-dated futures for 2017 and beyond, which had for months held firm despite the slump in immediate prices, finally fell last week. Global benchmark Brent crude for November LCOc1 fell 5 percent last week, hitting its lowest in over two years.

The implications of such a shift extend well beyond OPEC. It would likely accelerate shifts in the global balance of power, with consumer nations such as the United States becoming less dependent on producers like Russia or Iran.

END OF AN ERA

For most of the past decade, the oil market has been defined by shortage. Prior to 2008, years of underinvestment, roaring demand from Asia and fears of a looming "Peak Oil" fueled the price rally, and OPEC members have struggled to keep up with demand. Oil soared to nearly $150 a barrel by mid-2008.

Then, the financial crisis sent prices into a tailspin, forcing OPEC to make two sharp cuts - as it turns out, its last formal measures for at least six years. With demand stunted and U.S. shale breakthrough, the "Peak Oil" theme faded giving way to hope for abundance.

Yet oil prices held resolutely above $100 a barrel, with each potential downturn eventually thwarted.

In 2011, it was the breakdown in OPEC member Libya that fueled gains, cutting supplies by as much as 1.5 million barrels per day (bpd); later that year and in 2012, it was U.S. and European sanctions on Iran that choked off some of supply. Last summer it was Libya again as violence flared anew.

TEST FOR OPEC...AND SHALE PRODUCERS

The same could happen again next year. Growing tensions with Russia are putting supplies from the world's No. 2 producer at risk. Talks with Iran over a nuclear deal could sour, prompting calls to ratchet up sanctions. Yet the odds for another rebound are growing longer.

"The fire drill may be real this time," says Daniel Sternoff at Medley Global Advisors.

Now, either OPEC agrees to put a floor under prices in the short-term, or a prolonged period of lower prices starts to curb long-term investment or revive demand growth, he says.

The price downturn is not only testing OPEC's resolve but also the durability of the U.S. shale revolution, which has added 1 million bpd to U.S. output in each of the past 3 years.

It is far from clear when, or whether, OPEC will intervene. Sharp cuts in Saudi Arabia's oil sale price to Asian customers on Wednesday suggested that the world's largest oil producer will accept lower prices to maintain market share.

Bob McNally, a White House adviser to former President George W. Bush and now president of the Rapidan Group energy consultancy, said after a recent trip to Saudi Arabia that OPEC producers might wait for U.S. output cuts rather than cut production themselves. While some in OPEC are starting to call for cuts, core Gulf members are betting winter demand will revive the market.

That may change if oil prices slide another $10 or so. Not only will that squeeze budgets from Caracas to Moscow, but U.S. drillers would probably curb activity in the event of a "sustained pullback" below $80 a barrel, analysts at Baird Energy wrote in a report on Monday.

"US shale oil after all is not just the newest and biggest source of supply, but also high cost and most responsive to oil prices," said McNally. "North Dakota and Texas have effectively joined OPEC, though they may not have realized it yet."