U.S. Shale Surge Threatens OPEC Strategy

• U.S. Shale Surge Threatens OPEC Strategy

OPEC’s Nov. 30 output agreement to cut production by 1.2 million barrels a day may have put a floor under the oil price, but has also awakened U.S. shale.

Exploration and production companies have added 77 rigs this year to Feb. 24, according to the latest figures from Baker Hughes, while U.S shale production is forecast to reach about 4.87 million barrels a day in March, according to the Energy Information Administration’s latest Drilling Productivity Report.

That’s the highest since May 2016. Estimates of just how much shale will be added over this year range from as high as 900,000 barrels a day by Macquarie and Rystad Energy to a more modest 400,000 barrels a day by JP Morgan Asset Management.

E&Ps are also gaining access to capital in 2017. “The combination of a collapse in the cost of borrowing and increased hedging opportunities following the latest price rally has put U.S. shale oil producers back in business,” Ole Hansen, chief commodity strategist at Saxo Bank, said in an e-mail to Bloomberg Briefs on Feb.15. “Instead of cutting cost to meet the punitive borrowing cost witnessed a year ago they can now look ahead and begin making plans to expand production.”

Booming shale isn’t the only problem for OPEC. Crude stockpiles hit 518.6 million barrels in the week ended Feb. 17, according to the EIA. This is the highest level since the EIA began compiling weekly data in 1982.

U.S. crude production isn’t slowing down either. Since September, output has been rising at an average rate of 93,000 barrels a day, according to Bloomberg Oil Strategist Julian Lee, and is now back above 9 million barrels a day.

Still, all is not lost. OPEC’s Nov. 30 deal to cut production by 1.2 million barrels a day — led by Saudi Arabia — at present appears to be holding. January production figures from the organization (depicted by the blue bars), shows about 90 percent compliance with agreed production levels (depicted by the pink bars).

The question on everyone’s lips now is: Will OPEC extend the cuts after six months?