U.S. shale roars back at OPEC
LONDON (Bloomberg) -- OPEC may get its members to agree to continue to tamp down oil production, but it will be a Pyrrhic victory.
The biggest threat to the 13-member group’s dominance has been U.S. shale. In November 2014, OPEC decided to keep production levels high in the hope it could maintain market share. But that was a difficult task to begin with, and since then, U.S. shale producers have become even more efficient.
By the time OPEC reversed course in November 2016, sending oil prices up as much as 10%, shale had already gained ground.
There are areas in the enormous Permian and Eagle Ford shale fields in Texas where producers can break even at prices as low as $34 a barrel, according to Bloomberg Intelligence.
And analysts now say U.S. shale production will grow even faster than expected. Macquarie Group now thinks production will increase 1.4 MMbpd through December, up from a previous growth estimate of 0.9 MMbpd. JPMorgan Chase doubled its forecast to an increase of 800,000 bpd for the same period.
As OPEC and non-OPEC producers (namely Russia) cut back on production, U.S. shale producers are moving too quickly fill the gap. Their output increase is equal to about half of the OPEC cuts and twice that of Russia’s cuts, according to a report out this week by Eugen Weinberg, head of commodity research at Commerzbank.
“If the production cuts were to be extended, the participating countries would lose further market shares, which they are hardly likely to accept for any length of time,” the report said.
It isn’t going to get a lot better for OPEC in 2018, either. JPMorgan is forecasting U.S. shale to grow by 1.05 MMbpd next year, while Bank of America Merrill Lynch has a figure of 950,000 bpd.
Even a “drastic” downward shift in the market conditions won’t lead to a rapid collapse of U.S. oil production, according to Rystad Energy. Many wells that have been drilled—but haven’t been completed—could still be brought online profitably if the price falls to $40 or even $30/bbl, Rystad said in a report on May 11.
Are there any straws that OPEC and Russia can clutch? Well, yes. OPEC and its allies can only hope that increased U.S. production won’t jeopardize its aim of bringing down global crude stockpiles to the five-year average—putting a floor under prices and making sure they don’t plummet. Otherwise all the efforts of the last six months (and possibly next nine months) will be for nothing.
There have been some good signs. Stockpiles have been on the decline for the past six weeks, falling to 520.8 MMbbl in the week ended May 5. More importantly, since the beginning of January, the surplus above the five-year average has fallen from 129 MMbbl, to 110 MMbbl in the week ended May 12.
