23/05/2016 05:28 AST

The fact that oil prices are hovering around $50 per barrel because of reduced production rate is causing the price per barrel to harden. The sudden reduction in the conventional oil production by more than 3 million barrels is mainly due to the fire in Canada and the internal dispute in Nigeria as well as the unrest in Venezuela. Reduction in the overhung supply and entry of higher volume from Iraq and Iran also play a role in this aspect. As a result, some oil ministers are calling for halting any proposed freeze in the oil production and allowing each country to go for maximum production.

For the oil sector, this news came as a sudden and positive one since November 2014, and represents a complete turnaround for oil prices. Most analysts did not forecast the hardening of prices to happen so soon or not at least until the end of the year.

With the weakening of oil prices, the shale oil production in the USA as well as the number of oil rigs began to decline which in turn affected the overall production. The production rate in USA, which was at its peak of up to 9.4 million last year, could drop by 1.2 million barrels next year and experience loss of more than 500,000 barrels of shale oil.

It seems as though oil prices could increase to as high as $60 even before the end of this year. However, if it remains steady at such a level, it might tempt shale oil producers to resume production. Moreover, it is sustainable which will cause the oil prices to weaken again and lead to painful results all over again.

Shale oil, henceforth, will play the role of either standby or swing producer in order to fill any gap or shortage of oil but based on its own price merit and when the price is right and convenient. Oil price level of $60 and above certainly seems healthy under steady demand and stable price. Such circumstances can lead to revival of shale oil in a strong manner.

We cannot guarantee such circumstances but there are indications of steady increase in the demand for oil. From a long-term perspective, there are also indications that shale oil will be back again and will stay.

Nevertheless, situation seems positive for all oil producers, both conventional and non-conventional. All will be serving the global demand for oil.


Arab Times

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