The odds of an oil market share battle taking place in the near future are high.
That’s what Ed Morse, a Senior Adviser at Hartree Partners, and previously the Global Head of Commodity Research at Citi Group, told Rigzone in an exclusive interview recently.
“I believe these odds are in the 20 percent range for 2025 and well over 50 percent for 2026,” Morse said.
“The underlying factor has to do with the structural discrepancy between the two major elements in market fundamentals – supply and demand,” he added.
“The quickened pace of demand growth as the world emerged from the demand collapse induced by the Covid pandemic made it appear that the global economy was recovering and in a healthy state of affairs as inflation was tempering,” Morse said.
“But now it is clear that the long-term reduction in the oil intensity of the global economy is getting closer and closer to zero, whether measured in OECD Asia, Europe and North America, but also in China and even India, Brazil and Saudi Arabia,” Morse continued.
“As oil intensity of GDP growth keeps falling the world is experiencing short-term oil demand rising at around one million barrels per day this year and next, as global GDP growth stagnates at under three percent per annum – and it is likely to get much lower by 2030,” he went on to state.
Morse told Rigzone that supply, on the other hand, is relentless.
“The cost to OPEC+ to keep oil priced above $70 per barrel has been a record level of spare production capacity, which looks like it is in the 7-8 million barrel per day range now,” Morse said.
“And it is growing this year and next with capacity growth in Iraq, Kazakhstan, Kuwait, Russia and the UAE combined potentially adding two million barrels per day by next year at this time,” he added.
“And that doesn’t take into account liquids production growth in Brazil, Canada, Guyana, and the U.S. in the Western Hemisphere adding perhaps another one million barrels per day in this same timeframe,” he noted.
“Nor does it consider what could happen in Iran, Libya, Nigeria and Venezuela … nor does it take into account the growth of non-fossil fuel substitutes for oil products, whether in biofuels or other renewables,” he continued.
Morse told Rigzone that OPEC+ countries “are likely to keep their arms, if not their fingers, in an increasing number of potential holes in the dikes they have erected”.
“It appears as though the main OPEC+ countries will be able to push back on Trump pressures to help him keep his campaign promises of reducing energy costs,” he said.
“And they have every reason to do so for the time being, given the threats from the U.S. on reducing Iranian and potentially even Russian production this year by one to two million barrels per day. If that happens, they will be creating a political bind for themselves if they cut production beyond their planned monthly increases starting in April,” he added.
“Since the U.S. endgame would be to use the sanctions to pressure Iran and Russia… to change their policies … those OPEC+ countries are thinking hard about what incremental cuts they would have to make and how difficult it would be to get the agreement of OPEC+ countries to cut again,” he continued.
Morse also told Rigzone that, eventually, the key OPEC+ countries will have to confront an underlying structural problem in the oil market, combined with an underlying structural problem in OPEC+.
“The structural problem for the market is persistent and expected demand growth short of supply growth, and their increased loss of market share – and revenue for some,” Morse said.
“The structural problem for OPEC+ is the widening distinction among them in terms of break-evens, whether budgetary or current account break-evens,” he added.
“Here, the IMF numbers are telling, seeing Saudi Arabia’s fiscal break-evens at just shy of $100 per barrel in 2024 and still above $90 in 2025, while UAE and Kuwait hovered above $50 last year and is under $50 this year,” he said.
“So, it would appear that history is likely to repeat itself as it has every few years starting in 1985, with a production-induced effort to bring prices down to below break-evens not just in some OPEC+ countries, but in major producers like the U.S., Brazil and Canada, which have led the growth of production from non-OPEC+ countries,” Morse warned.
Morse told Rigzone that prices below $60 would be inevitable. How far below and for how long remain open questions, he said.
In a separate exclusive interview, Kristian Coates Ulrichsen, a fellow for the Middle East at Rice University’s Baker Institute for Public Policy, and co-director of the Middle East Energy Roundtable, said he thinks “Trump will find it more difficult than he may imagine to influence U.S. companies’ decisions about production and output levels”.
“The big difference that separates Trump from the leadership in Russia or Saudi Arabia is that he does not have any direct control over energy sector decision-making, and that might reduce the risk of a war for market share in which the U.S. is a participant, at least in the same way that we saw for example in 2010 when the Saudis and Russians went head to head,” Ulrichsen added.
In another exclusive interview, Doug Bandow, a Senior Fellow at the CATO Institute, highlighted to Rigzone that Trump “wants to increase the total quantity [of oil] sold to bring down prices”.
“If the quantity doesn’t change, the relative shares don’t matter. However, the way countries try to gain share typically is to increase the quantity sold. If so, that would drive down prices,” he added.
“The Saudis have an advantage as the low cost supplier – they can still profit while driving down prices. However, they usually would prefer higher prices, maintaining total revenue while selling less oil,” he continued.
In a Q&A format research note by BMI, a unit of Fitch Solutions, which was sent to Rigzone on January 29 by the Fitch Group, analysts at BMI noted that growth in the U.S. shale sector has been a source of tension within the OPEC+ group, but said a price war is unlikely.
“A price war with the U.S. would involve OPEC+ producers maximizing their output to undercut prices and drive shale production into decline,” the analysts said in the report.
“Given that the group holds over five million barrels per day in spare capacity, the impact on Brent would be swift and severe, with a decline below $50 per barrel almost inevitable,” they added.
“However, this would be fiscally painful for the cartel, putting a severe strain on the core OPEC+ members that rely heavily on oil revenues to finance their government spending,” they continued.
Rigzone has contacted OPEC, the Trump transition team, the White House, Natural Resources Canada, and Brazil’s ministry of foreign affairs for comment on Morse’s statement. Rigzone has also contacted OPEC, the Trump transition team, and the White House for comment on Ulrichsen and Bandow’s statements and BMI’s report. At the time of writing, none of the above have responded to Rigzone.
To contact the author, email andreas.exarheas@rigzone.com