Greece might be center stage in Europe, but a bigger issue is oil.
A rush by Europe to limit oil and gas imports from Russia is pushing the region deeper into the grip of a slightly less unpleasant supplier of essential fuels, OPEC.
Changing trade patterns caused by geological and geopolitical events means that Europe has become the number one target of the Organization of Petroleum Exporting Countries, the Arab-led oil producing cartel.
Geology And Politics Are An interesting Mix
Geologically, the growth of the unconventional (shale) oil industry in North America means that a large part of the global market is no longer the big importer of fuel it once was.
Geopolitically, the increasing isolation of Russia from trade with the western world means it is targeting China, India and the rest of Asia for its oil and gas exports.
Russia Is Eating OPEC’s Lunch In Asia
The upshot of those forces is that OPEC is getting squeezed out of Asia by Russia with the organizations members working hard to cultivate Europe as their major market, even to the point of offering discounts to develop business.
An analysis of changing oil and gas trade flows is one of the interesting aspects of a study titled Oil and Gas Reality Check by the international accounting and consulting firm Deloitte .
The first two of six key findings by the study was that shifting supply and demand fundamentals are fueling a “power play between traditional and new oil suppliers” and that as the oil and gas industry changes “new global trade patterns are emerging.”
32% And Falling
The other findings included a reminder that OPEC itself is under pressure with a falling market share, liquefied natural gas (LNG) is a buyer’s market thanks to rising supply, and capital spending in the oil and gas industry is falling.
Find out what’s happened to the oil industry—and where it’s headed next.
The Deloitte study, written before this week’s nuclear deal with Iran which should see that country boost oil exports, touches briefly on the declining market share of OPEC which is expected to slip from 32% of the world’s crude oil market to 27% by the year 2018 thanks to the rise in U.S. oil production.
But, the issue which has the greatest potential to change the way the oil and gas industry behaves over the next few years is the rising level of Russian exports into Asia, with OPEC potentially finding itself being displaced as the market leader.
The rise of Russian oil and gas in Asia is a profound problem for OPEC which in 2013 sent almost 60% of its exports to China and other Asian countries.
Russia’s Pivot To Asia Is Hurting
As relations between Russia and Asia develop in what Russia refers to as its “pivot to Asia” Deloitte said OPEC “may look to expand its share of the Western Europe market,” but might find that this does not fully replace the market it risks losing in Asia.
The importance of Western Europe to OPEC can be seen in the close attention being paid to the region by the world’s biggest oil producer, Saudi Arabia just as Europe’s domestic oil industry continues to decline with output already down 50% on the 2002 production rate.
“Saudi Aramco cut the official selling price for its Arab light crude to north-west Europe by $1.50 per barrel in February this year, putting it at a discount of $4.65 per barrel to the Brent weighted average price, the lowest price since 2009,” Deloitte said.
Haves And Have Nots
The report shies away from tipping the death of OPEC but does re-visit the question of “haves” and “have not” in the organization.
Big, low cost, OPEC members such as Saudi Arabia, Kuwait and Qatar have the financial muscle to ride out a protracted downturn in oil ans gas prices.
“The remaining OPEC members, however, are facing greater challenges,” Deloitte said.
GCC To Replace OPEC?
“Some argue that the divergence between OPEC have and have-not nations may create a splintering of those countries whose break-even points require higher oil prices than those that currently prevail.”
While concluding that the long-term trajectory of the oil and gas industry was unlikely to effected by price fluctuations significant changes could occur. Some Canadian projects were likely to become uneconomic in the short term, and the U.S. shale break-even oil price was likely to continue falling.
“Taken together, these trends suggest that OPEC’s power over long-term market movements is waning,” Deloitte said.
“Certainly, its dominance as a coordinated entity is long past.
“Yet the end of one era often signals the start of another; arguably the Gulf Cooperation Council (GCC) states could stand in for OPEC in the years to comes,”