Executive Summary

On September 25, 2017, speakers and discussants from the oil industry, finance, government, and academia convened in Washington to examine the challenges of navigating the new oil era at the third annual Arab Gulf States Institute in Washington Petro Diplomacy conference. In a period of tremendous flux for the industry, oil producers are striving to establish strategies that can meet the challenge of a technology-driven, lower oil price environment. At the same time, national oil companies of the Gulf Cooperation Council states are restructuring their business operations toward a more profit-oriented model to fully monetize their hydrocarbon resources and deliver increased revenue to governments.

The past year in oil markets has been defined by the extraordinary measures taken by OPEC and non-OPEC countries to stabilize prices through collective action, which has provided a pillar of support for Gulf Arab states to enact much-needed fiscal and social reform.

“Petro Diplomacy: Navigating the New Oil Era” focused on the dynamics of OPEC and the oil market, what national oil companies and independents are focusing on for their current and future strategies, and what to expect in terms of economic and political flashpoints in the days and years ahead. The conference also identified fundamental questions that will shape the energy landscape: How will the production of shale oil respond to incremental shifts in price, and how quickly? What geopolitical and geoeconomic pitfalls lie ahead?

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Key Findings

• A $50-60 per barrel range is expected through 2017 and 2018, with limited upside potential for oil prices, barring a major supply disruption or geopolitical crisis. In the medium term, stronger than forecast global oil demand, reduced capital spending, and a less robust outlook for shale could push prices much higher by the end of the decade.
• The success of the historic OPEC and non-OPEC agreement in cutting production has exceeded industry expectations. However, market confidence in the ability of OPEC and non-OPEC producers to maintain strong compliance with lower production levels is waning as several key participants continue to exceed targets and the group seems reluctant to make deeper production cuts amid the much slower market rebalancing.
• This dynamic market management policy has a much stronger foundation than previous agreements, anchored by high-level diplomatic efforts by Saudi Arabia and Russia and a shared financial imperative among all oil producers. Monthly monitoring of production compliance has also strengthened the accord.
• The long awaited rebalancing of fundamentals finally took hold in the first half of 2017 but stocks are being drawn down more slowly than initially hoped and draining excess supplies could take another year. Stronger than expected global oil demand may hasten the drawdown.
• The massive inventory surplus has muted price volatility of extreme geopolitical risk in the Middle East and around the world but as stocks contract further and the market rebalances, the buffer to risk will correspondingly erode and expose the market to more risk-related price volatility. Multiple, ongoing political risks in Libya, Nigeria, Venezuela, Iran, and Iraq could escalate and lead to increased price and supply volatility.
• Forecasting shale oil production remains an enigma but lower available capital market financing is signaling more constrained growth in 2018. The threat of shale production growth is often overestimated, ignoring the serious inconsistencies in well production stemming from the quality of rock.
• Questions remain whether national oil companies can restructure their operations to meet the challenges of this more competitive new oil world. Reduced capital expenditures are leading some experts to warn a supply crunch is on the horizon while others argue that new short-cycle nonconventional oil will be able to meet any shortfall.
• The most difficult issue on the structural side of reform for Gulf Arab states is how to create more jobs for their large youth populations. Those countries that can plug into global trends on the industries of the future will be most likely to succeed.