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The United States shale producers have disrupted the OPEC status quo and helped push the oil price to multi-decade lows. Technological innovations  have given these producers the ability to regulate production at a faster rate than OPEC and other non-OPEC producers, making them adaptable to any price environment. However, even these operators are not profitable  below the $40 level. Yet, they can survive due to the nature of the oil partnerships in the U.S. Whereas oil operations in the Middle East and Russia are fully integrated, the areas of upstream (oil extraction), midstream (oil transportation on ship, truck or through pipeline) and downstream (refining oil into gasoline, heating oil and other products) are one system controlled by the state. In the U.S. each area is a separate entity, where upstream operations sign contracts with midstream companies to lock in prices. Currently, U.S. shale producers are in desperate need of revenue to pay off debts incurred to survive the low price environment. An oil price above $40 a barrel is profitable for the competitive producers on the market. Once they have locked in prices with midstream operators, they can increase production. However, this is a short term solution to generate revenue, but results in the price of oil declining to unprofitable levels. To counter this, producers have been amassing short positions. An individual taking a short position anticipates a decline in price of an asset. In essence, U.S. oil producers are betting against themselves. U.S. producers will profit from the agreed prices with midstream companies and from the short positions on the financial market. Regardless if the oil prices rise or fall, U.S. producers will profit. 

$30, Oil, Six Months, Commodities, U.S. shale, producers, cannot lose, fx trader, forex BrentChart 2.

Speculation should move the price of Brent and WTI up to $52 and $47 a barrel respectively. At which U.S. producers have an opportunity to lock in profits and increase production. Saudi Arabia, Iran and Russia not wanting to lose market share will maintain their current quotes to remain competitive. This will push the price of Brent and WTI down to the $30 a barrel towards the end of July.

The struggle for market share between OPEC and non-OPEC producers has driven the price of oil down to multi-decade lows. U.S. shale producers are using technology and the financial markets to ensure they outlast larger state operators. Oil producing nations will continue to oversupply the market until they have achieved their objectives. The prospect of a production cut between these nations is remote. The result will see Brent and WTI move lower through the second and third quarter of the year.

Michael Stapleton 
Crude Oil Market Analyst
Oil Pips

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