As Crude Pricing Rises, U.S. Tight Oil Producers to Become Hub of Global Oil Market

Despite concerns that the plunge in crude prices would halt the U.S. shale oil revolution, the reality is that America will emerge from the downturn as one of the lynchpins of global supply and demand dynamics in the energy market.

This week, in the latest of a series of webcasts entitled "Oil: The Great Deflation," a team of IHS experts presented "The New Math of Oil: Oil Market Outlook to 2020."

Jim Burkhard, vice president at IHS, and Aaron Brady, director of research at IHS, discussed the outlook of the crude oil supply, demand and pricing through the year 2020. The two experts looked in detail at the factors currently driving the drop and eventual recovery in pricing and the key role that U.S. producers are playing in these events.

The oil market is predicted to undergo two phases during the next six years: the current stage of surplus supply, weak demand growth and downward price pressure that will likely last through 2016 followed by a period of weaker supply gains, stronger demand growth and rising prices from 2017 through 2020.

In November, the Organization of the Petroleum Exporting Countries (OPEC) decided not to throttle back oil production to prop up prices-the first time in more than a generation that the group decided not to act as the swing supplier for crude.

Some observers have opined that OPEC-particularly Saudi Arabia-may have been attempting to drive the U.S. tight oil providers out of the market with its decision not to cut production. The tight oil boom coupled with falling demand, especially in China, has caused a significant oversupply in the market, resulting in a dramatic drop in prices and profits for all producers, including the OPEC nations.

However, just as U.S. oil production increases were partially responsible for the price collapse, the United States may well be the most important factor in the rebound during the next five years.

A slowdown in U.S. production growth starting in the second half of 2015 will be essential to rebalancing the market from its oversupplied state. Conversely, a possible strong recovery in U.S. production growth starting in 2018 could be a factor preventing market prices from overheating again.

The United States will set the pace of the global oil market thanks to its quick responsiveness to changing market conditions. The country's energy industry can resume drilling with short lead times, and has relatively low capital expenditures, plus access to investment dollars even in the current low price environment. U.S. oil drillers demonstrate remarkably fast responses to changes in near-term oil prices.

With OPEC having abdicated its role as swing producer for now, U.S. tight oil is playing a key role in the global crude market given it's far more elastic response to oil price changes compared to conventional sources of supply.

The next presentation in The Great Deflation Framework Series will be: "Short Term Oil Market Outlook: Volatility, Stock Builds Keeping Pressure on Prices."

Learn more about Oil: The Great Deflation and IHS Crude Oil Markets.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.