Increased Shale Production Threatens Oil Price Ramp, OPEC Cuts

• 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.