In Fight Against US Shale Oil, OPEC Risks Lower for Longer

In Fight Against US Shale Oil, OPEC Risks Lower for Longer
In their battle to revive the global oil market, OPEC and its allies are digging in for a long war of attrition against shale.

(Bloomberg) -- When Khalid Al-Falih arrived at Davos in late January, the Saudi oil minister was exultant. The output cuts he’d painstakingly arranged with fellow OPEC states and Russia were working so well, he said, they could probably be phased out by June.

Almost five months later, U.S. production is rising faster than anyone predicted and his plan has been shredded. In a series of phone calls and WhatsApp messages late last week, Al-Falih told his fellow ministers more was needed, according to people briefed on the talks, asking not to be named because the conversations are private.

In their battle to revive the global oil market, OPEC and its allies are digging in for a long war of attrition against shale.

"OPEC is now recognizing they need longer -- and potentially deeper -- production cuts than they have anticipated," said Jamie Webster, a senior director for oil at the Boston Consulting Group Inc. in New York.

From the beginning, Saudi Arabia saw a quick one-off intervention: reduce production for a few months and speed up the recovery. The strategy had an option for a six-month extension, but Riyadh initially thought it wouldn’t be needed. U.S. shale, the plan assumed, wouldn’t recover fast enough.

And yet, shale has defied the naysayers. By the time OPEC meets in Vienna on May 25, U.S. output will be approaching the 9.5 million barrels a day mark -- higher than in November 2014 when OPEC started a two-year price war. The rebound has been powered by turbocharged output in the Permian basin straddling Texas and New Mexico.

Forced to adjust to lower prices, shale firms reshaped themselves into leaner operations that can thrive with oil just above $50 a barrel. Brent crude, the global benchmark, added 5 cents to $50.82 a barrel as of 9:59 a.m. in New York.

Since OPEC agreed to cut output six months ago, U.S. shale production has risen by about 600,000 barrels a day, wiping out half of the cartel’s cut of 1.2 million barrels a day and turning the rapid victory Saudi Arabia foresaw is turning into a stalemate. Al-Falih said this week Saudi Arabia is now pushing to extend the cuts "into the second half of the year and possibly beyond."

On Thursday, OPEC’s own monthly oil market report said that production from non-members would rise 64 percent faster than previously forecast this year, driven mainly by U.S. shale fields.

So far, OPEC hasn’t been able to "cut supplies faster than shale oil can increase,"  said Olivier Jakob of consultant Petromatrix GmbH.

Al-Falih and his OPEC allies have made some progress. U.S. crude stockpiles have started to drop and the amount of oil in floating storage is contracting. The International Energy Agency and banks including Goldman Sachs Group Inc. predict a further contraction in stockpiles in the second half of the year.

Yet, the cartel faces big risks. The most prominent is that extending cuts lifts the oil price high enough for shale to hedge again, as it did earlier this year.

"The dilemma now for OPEC and their key non-OPEC partners Russia and Oman is that cutting to support prices risks stoking the embers of a shale fire storm," said Adam Ritchie, director at Petro-Logistics in Geneva.

Increasingly, the oil market believes the real battle between OPEC and Russia, on one side, and shale, on the other, will take place in 2018, when an increasing number of observers predict U.S. production will flood the market as it did in 2014.


12

View Full Article

Copyright 2017 Bloomberg News.

WHAT DO YOU THINK?

Click on the button below to add a comment.
Post a Comment
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Related Companies
Events  SUBSCRIBE TO OUR NEWSLETTER

Our Privacy Pledge
SUBSCRIBE



Most Popular Articles

From the Career Center
Jobs that may interest you
Operator Assistant
Expertise: Regulatory Compliance|Rig Mover|Wireline
Location: Bakersfield, CA
 
Operations Coordinator
Expertise: Logistics Management|Operations Management
Location: Sugar Land, TX
 
Director of Contracting
Expertise: Contracts Engineer|Refinery Specialist
Location: Salt Lake City, UT
 
search for more jobs

Brent Crude Oil : $53.96/BBL 0.35%
Light Crude Oil : $51.36/BBL 0.21%
Natural Gas : $3.209/MMBtu 0.34%
Updated in last 24 hours