Why U.S. Shale Won’t Derail The Oil Rally

0
35

By Tsvetana Paraskova

For the first time in nearly a decade, OPEC has solid reasons to believe that its control over the global oil supply will not be ruined by a surge in U.S. crude oil production.  The ongoing restraint in drilling activity in the shale patch would make the efforts of OPEC and its allies in the OPEC+ group to manage supply to the market this year a much easier task.

Last week, OPEC+ was reportedly told by major international forecasters—including the Energy Information Administration (EIA), the International Energy Agency (IEA), Wood Mackenzie, IHS, Argus Media, Energy Intelligence, and Energy Aspects—that U.S. crude oil production would grow by just 200,000 barrels per day (bpd) this year, OPEC sources told Reuters at the end of meetings of OPEC’s economic and technical think-tank, the Economic Commission Board.

For 2022, the views range from production growth of between 500,000 bpd and 1.3 million bpd.

All in all, the general view among external forecasters was that the shale patch would not be rushing into accelerating activity and production rates despite the high oil prices. That’s so unlike the previous behavior of U.S. oil producers, which used to prioritize production over profits, contributing to market oversupply and lower oil prices.

But after the second major oil price downturn in half a decade, the shale patch put the brakes on drilling activity in 2020 and continues to be careful with capital spending, prioritizing returns to shareholders to production records.

U.S. production has been hovering at around 11 million bpd in recent months, down by 2 million bpd from the record highs early in 2020, before the pandemic slammed demand and crashed oil prices.

The first-quarter earnings and conference calls of U.S. producers highlighted a previously unheard-of restraint from public shale firms. Listed producers generated record cash flows, but they are not reinvesting most of those back to drilling. Instead, shale operators are now channeling cash flow toward reducing debts and rewarding investors.

OPEC itself sees average U.S. crude oil production this year at 11.2 million bpd, down by 120,000 bpd year over year, the cartel said in its latest Monthly Oil Market Report (MOMR) for June.

“Despite the current recovering trend in US crude oil production, particularly in the Permian Basin, and the expected exit rate at 11.6 mb/d in December 2021, average US crude production in 2021, will remain lower by 0.12 mb/d, y-o-y, at 11.2 mb/d,” according to OPEC’s estimates.

The EIA expects American crude oil production to average 11.1 million bpd in 2021, as per the latest Short-Term Energy Outlook (STEO) for June.

Next year, U.S. oil production is set to grow by 700,000 bpd to an average of 11.8 million bpd.

“Because prices of West Texas Intermediate crude oil remain above $60/b during 2021 in the current forecast, we expect that producers will drill and complete enough wells to raise 2022 production from 2021 levels,” the EIA said.

Even the EIA forecast for next year’s production growth is moderate, especially compared to the growth rates between 2017 and 2019.

The 1.3 million bpd expected growth at the top end of the external forecasters OPEC heard last week may be overly optimistic as producers continue to be under pressure to deliver in terms of returns instead of in plowing every available cash, and more, back into drilling, Texas-based energy analyst and consultant David Blackmon notes in Forbes.

Slow growth rates in the U.S. shale patch—if forecasts materialize—would give OPEC+ more clarity about near-term supply outside the alliance. Restraint in U.S. drilling gives more control to OPEC to manage the market with its ongoing production cuts.

The OPEC+ group is currently easing those cuts, but it still keeps around 5.7 million bpd off the market.

“What is clear, however, is that OPEC+ remains firmly in control while global demand continues to recover. At least until a time when non-OPEC+ producers react to increased revenues and profitability by boosting output,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Friday.

The OPEC+ meeting on July 1 is set to decide the policy course from next month. The decisions at that meeting would “send a clear signal” whether the alliance will seek even higher prices by keeping supply artificially tight, or whether it prioritizes stability through increased production, Hansen noted.

Crude Oil

LEAVE A REPLY

Please enter your comment!
Please enter your name here