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Increased Shale Production Threatens Oil Price Ramp, OPEC Cuts

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  • Increased Shale Production Threatens Oil Price Ramp, OPEC Cuts

The rising oil price has not only brought market stability to the global oil industry but joy to oil producing countries, especially those whose economies depend on oil proceeds for survival but this joy is being threatened increased output from shale.

The International Energy Agency (IEA) Executive Director, Fatih Birol, said at an event that oil producers may be enjoying oil prices at $65 and $70 per barrel, but these price levels are likely to encourage even more oversupply from United States (U.S.) shale.

For most of last year, the resurgence of US crude oil production was capping price gains and offset part of the production cuts that Organisation of Petroleum Exporting Countries (OPEC) and its Russia-led non-OPEC partners have been implementing since January last year, report said.

The report further noted that this year also started with the OPEC vs. shale tug-of-war, although in the first two weeks of 2018, geopolitical risks and declining inventories overshadowed concerns over the rise in US shale, and supported oil prices and sent Brent briefly breaking above $70 a barrel.

US shale is expected to continue to counteract OPEC production cuts this year. EIA’s latest Short-Term Energy Outlook from earlier this week estimated that US crude oil production averaged 9.3 million bpd in the whole of 2017, and 9.9 million barrels per day (bpd) in December alone.

This year, US crude oil production is seen averaging 10.3 million bpd in 2018, beating a record dating back to 1970. For 2019, EIA expects US production to increase to an average of 10.8 million bpd and to surpass 11 million bpd in November next year.

The Paris-based IEA said in its latest Oil Market Report from December that “On considering the final component in the balance—non-OPEC production—we see that 2018 might not be quite so happy for OPEC producers.”

The IEA warned that mostly due to US shale, total supply growth could exceed demand growth. Oil prices are currently at levels at which US production could substantially increase. According to the Q4 Dallas Fed Energy Survey published at the end of December, 42 per cent of executives at 132 oil and gas firms expect the US oil rig count to substantially increase if WTI prices are between $61 and $65 a barrel, the Financial Tribune reported

The IEA report indicates that the United States may be on its way to reclaiming its position as the world’s top crude oil producer, overtaking Russia and Saudi Arabia.

Russia produced an average of nearly 11million bpd in 2017, while Saudi Arabia produced about 10 million barrels per day. Both countries, though, have been keeping a check on their output in 2017 courtesy the output constraint arrangement between the OPEC and its non-OPEC allies.

When the US shale output began impacting the global energy scenario, many felt it was phase in passing but not anymore.

In fact, by 2012, the crude scenario appeared changing as the long-term impact of the shale revolution began to unfold. In its 2012 World Energy Outlook, the International Energy Agency conceded that the global energy map was changing, ‘with potentially far-reaching consequences for energy markets and trade.’ As per the IEA, a new era was being redrawn by the resurgence in oil and gas production in the United States.

It then emphasised that energy developments in the United States were profound and that their effect was to be felt well beyond North America – and the energy sector. As a consequence, global energy geopolitics also underwent major adjustments over the next few years.

The IEA then underlined that the US energy market was going through radical upheaval, sparked by the development of new technologies, especially the extraction of shale gas through a controversial process called ‘fracking’ that has been limited or banned in other countries.

The report projected that by 2020, the United States was set to become the largest global oil producer (overtaking Saudi Arabia until the mid-2020s), and resulting in a continued fall in US oil imports, to the extent that North America would become a net oil exporter around 2030.

Global headlines began screaming almost immediately: The United States will overtake Saudi Arabia as the world’s leading oil producer around 2017 and will become a net oil exporter by 2030.

“North America is at the forefront of a sweeping transformation in oil and gas production,” Maria van der Hoeven, the then IEA Executive Director said in London while unveiling the WEO-2012, underlining that the US would overtake Russia in gas production by 2015.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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