BACK TO THE EGG: US SHALE OIL VS. OPEC

According to his promises during the election campaign, freshly inaugurated US President Donald Trump has announced that his administration will support the so-called oil and gas revolution, making the US independent from OPEC oil exporting countries. As noted by analysts, he is not the first one trying to achieve this goal. In the ‘70s it was Henry Kissinger who tried to do it, whereas former President George W. Bush had aimed to reduce oil imports from the Middle East. None of them succeeded.

As things look in early 2017, we’re heading back to the egg – i.e. to the ‘war’ between the US shale gas producers and the OPEC. In 2014 OPEC turned down the option to cut the output, the member countries trying to keep their market share and to drive the US shale oil producers away from the profitability range. It didn’t work out and the oil prices fell sharply by midyear to lead to a consistent crisis on the energy market worldwide and to large budget deficits for the oil exporting countries. The recent OPEC decision in late 2016 to cut the output, in the attempt to reduce oversupply and to increase world oil prices, seemed to work, for a change – the oil price surged in January above USD 55 per barrel. But this development had brought back to life the US shale oil producers have more economic base and motivation. Recent information show this is really what is happening. The US oil production is on the rise and the US Energy Information Administration (EIA) forecasts an increase of some 41,000 barrels per day in February, up to the level of 4,748 million barrels per day, adding that if the trend is maintained, the shale oil output might reach 500,000 million barrels per day by yearend. Overall, the US oil production, as forecasted by EIA, would reach 9 million barrels per day.

It’s rather a small revolution that has taken place in January. The number of rigs drilling in the US increased by 35 in only one week, up to 694, confirming the largest increase in one week during the past five years. Since the low point registered at the end of May 2016, the number of rigs went up by 290, i.e. about 70%.

Consequent to such evolutions the IEA warns that the shale oil is reviving and could most probably lead to another fall in worldwide oil prices. In addition to the above mentioned data, the IEA anticipates an increase of 170,000 barrels per day on average for 2017. To the already increasing pressure on oil price come some projects started years ago by Brazil and Canada, they would bring on the market some 415,000 barrels per day. According to IEA the OPEC cuts agreed upon late last year, a decrease of 900,000 barrels per day in January, up to 1.2 million barrels per day, would tighten the market during the first half of 2017. Nevertheless, the higher output of non-OPEC countries could lead to another price fall in the second part of the year, greater price volatility is set to return, the IEA says.
As one analyst put it, the OPEC and non-OPEC oil exporting countries have helped the declining US shale gas sector get back to life.

“Supply is a big factor right now and you have the US are really filling the gap that OPEC has left open,” a US analyst said.
In this context, there is room for speculations and scenarios. Some say that a fast shale oil output increase would most likely lead to the end of the output cuts agreed upon by the OPEC and non-OPEC countries and turn back to the unsuccessful policy of keeping the market share by increasing their own output. The same analysts point to Saudi Arabia as the driver in this regard.
“Few placed faith in any OPEC action as production from that side was rising strongly. Now however, the uncertainty around both of these factors has cleared to a large degree. American shale oil producers are alive and kicking,” an important bank analyst said.
And yet...
The OPEC and non-OPEC countries do not seem too preoccupied by the recent developments.
Saudi Oil Minister Khalid Al-Falih recently said, during the World Economic Forum in Davos, that the current prices varying around USD 50 per barrel are not enough to lead to a significant return of the US shale oil production, and that he expects the costs to go up over long-term for the US drillers. “As demand goes up, they would go to the more expensive, more difficult, less prolific areas of the shale and I think they will find that they need higher prices,” Al-Falih said.
In an interview for CNN the Saudi minister said “I don’t lose sleep that shale is going to come and overwhelm us. I don’t think it will.”

Kuwaiti Oil Minister Essam Al-Marzouk expressed a similar opinion, following the meeting of the Joint Ministerial Monitoring Committee (JMMC). The minister said the possible expansion of shale oil production is not a threat to the global oil market, as demand is expected to equal supply over 2017. “As prices grow, we expect production to grow alongside them,” Al-Marzouk said. “We are not worried about the potential rise in shale oil output, as we believe the global demand will consume any excessive volume.”
The other oil exporting countries are rather relaxed as well. Algerian Energy Minister Noureddine Boutarfa underlined that “OPEC and other producers are due to reach the 1.8 million-barrel-a-day reduction target next month,” according to the deal. His opinion is shared by the Kuwaiti Oil Minister, who claimed the nations are likely to comply with the deal and the curbs will bring global crude oil markets into balance this year.

In his turn, former Russian Energy Minister Igor Yusufov has recently dismissed concerns that the US shale oil companies could try to use the output cuts by Russia and by the Middle East oil exporters to take over part of their market share.

Fereydoun Barkeshli, President of Vienna Energy Research Group, former General Manager of the National Iranian Oil Company (NIOC) explained the decision made by OPEC. “OPEC’ decision was intended to force non-OPEC countries to cooperate with the organization’s pricing policies that proved to be relatively successful, to send a powerful message to US shale oil and gas producers. (...) The organization has already thrown some 2.5 million barrels a day of shale oil out of market. This volume of crude from shale cracking cannot be immediately returned to the market, because of complicated cracking production structure,” Barkeshli said.

He also predicted that the OPEC ministers would call on the US shale oil producers to join in and voice support for the organisation’s policy aiming at market stability.
On the other hand there is uncertainty regarding the coming US policy with Tehran and there is talk about a possible reinstating of the sanctions lifted one year ago. Would Iran be ousted again from the world oil market? With what consequences? The first tensions have been stirred by President Trump’s decision regarding immigration and banning citizens coming from several countries from entering the US. Tehran has made a similar decision for US citizens. Meanwhile, Iran’s energy exports are increasing, the crude oil and gas condensate exports are expected to reach 2.2 million barrels per day in February, following a level of 2 million barrels per day in January. The post-sanctions peak was reached in September – 2.6 million barrels per day.
So, the world is going back to the uncertainties, to the ‘war’ between traditional oil exporters and the US emerging shale oil producers. It is an energy consuming battle with unknown winners, if some winners are expected. For the time being, during the oil crisis, many would say all parties lost, in one way or another. Some had to close down exploitations, others have put on hold investments or had to rethink their domestic policies as the budget deficits climbed.

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