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Don't Believe The Hype On U.S. Shale Growth
Submitted by Robert Rapier via OilPrice.com,
The OPEC Free Fall
There is a popular narrative going around that I want to address in today’s article. Last November, after several months of plummeting crude oil prices, the Organization of the Petroleum Exporting Countries (OPEC) met to discuss the oil production quotas for each country in the months ahead. Many expected OPEC to cut production in order to shore up crude prices that had been falling since summer. This was the strategy favored by OPEC’s poorer members, as many require oil prices at $100/barrel (bbl) in order to balance government budgets.
Instead, OPEC announced that they would continue pumping at the same rate. They chose to defend market share against the surge of supply from U.S. shale producers, and in doing so the fall in the price of crude oil accelerated. A look at the U.S. rig count shows the swift impact to U.S. shale drillers in the aftermath of that meeting:
Rig counts went into free-fall after it became clear that OPEC was not interested in propping up the price of oil for the benefit of rapidly expanding shale oil producers. While that approach hurt OPEC’s income in the short term, it also immediately impacted rig counts in the shale oil fields. But — and here is the narrative — shale oil producers continue to make gains in production even as rig counts have been slashed because they are becoming more and more efficient
Dissecting the Narrative
There is some truth to the narrative. Yes, oil production has continued to grow even though rig counts have plummeted. The week before OPEC’s meeting last November, the number of rigs drilling for oil stood at 1,574. Oil production that week was 9.1 million bpd. Today, with the rig count at 642, production is 9.6 million bpd — a gain of just over half a million bpd.
Yes, producers are getting better at squeezing oil and gas from these shale formations. And natural gas production has indeed continued to expand for years despite a sharp drop in the rigs drilling for gas.
But oil production isn’t expected to follow the same pattern as natural gas. The gains are already slowing as a result of the drop in rig counts. There have been some weekly declines recently, and the Energy Information Administration (EIA) is projecting a 91,000 bpd drop over the next month.
Bloomberg put together a nice graphic showing the expected impact in the country’s shale oil basins:
OPEC’s Latest Decision
Leading up to OPEC’s June 5th meeting, there had been much speculation about the direction OPEC might go now that one of its key objectives had been achieved. Most believed it wouldn’t do anything drastic enough to shake up the oil markets again. I placed the odds of either a big production cut or a production increase at under 10%. I estimated a 40% chance that production would be left unchanged, and a somewhat greater than 50% probability of a modest production cut.
There was risk either way. Leaving production unchanged ran the risk of sending crude prices back toward $40/bbl. This would the hurt poorer members of OPEC, which have historically favored higher prices. On the other hand, low prices would continue to slow down the U.S. shale oil boom.
A modest production cut would have satisfied OPEC’s poorer countries, but would have also likely boosted oil prices toward $70/bbl. This would start to bring marginal shale oil production back online.
There were also variations of these two outcomes. OPEC could have announced production cuts but not actually made any. The organization is notorious for exceeding its production quotas, so that wouldn’t have been a big surprise. Or, it could have left production unchanged, while attempting to talk up the demand side of the equation in order to limit a marker overreaction. That is in fact exactly what OPEC did.
In announcing a decision to leave production unchanged — the same decision that led to last winter’s plunge toward $40/bbl — OPEC noted that world oil demand is forecast to increase in 2015 and in 2016, with growth driven by developing countries. On the supply side, non-OPEC growth in 2015 is expected to drop below 700,000 barrels per day, about one-third of the supply growth in 2014. With supplies expected to tighten in the months ahead, OPEC therefore saw no need to cut production.
While the exporters’ club is certainly known for self-serving statements, I believe it is correct here in noting the trajectory of supply and demand in the months ahead. Shale oil production growth is going to continue to slow (if not decline), while global demand growth will start to outpace the new supplies coming online. By leaving the production quotas unchanged OPEC is letting growing demand catch up to North American output growth, and counting on this to prevent an extended slump.
It is interesting to note that the price of WTI has already moved up 6% in the wake of the OPEC meeting. It looks like traders accept the tightening supply narrative, which runs contrary to the narrative that shale oil production will continue its growth trajectory at $60/bbl oil due to the increased efficiency of the shale oil extraction technologies.
The odds look good that OPEC will also have to accommodate production from Iran should sanctions soon be lifted as anticipated. But this won’t impact the global supply/demand balance for a few months, and is something that will probably be a big topic at OPEC’s next meeting in December.
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Oilprice.com, bitchez!
In other news, Bureau of Government Statistical is report increase in chocolate ration from 5g per day to 20g per week. Many job is created and saved. Oceana is prevail in war with Eurasia and strategy is successful without is boot on ground.
And we're paying $4 a gallon in California.
Oops!
All this talk about OPEC without mentioning that OPEC exports only about 30 million barrels a day out of 92 million barrels consumed everyday. And no mention of the US attack on Russian energy exports as part of the full spectrum war against Russia and Putin.
Another limited article which ignores the big picture of geopolitics and the price of oil.
U.S., Russia engage in Cold War-like ‘chess match’ over energyhttp://www.pbs.org/newshour/rundown/us-russia-engage-cold-war-like-chess...
Who Is Behind the Oil War and How Low Will the Price of Crude Go in 2015?http://www.globalresearch.ca/who-is-behind-the-oil-war-and-how-low-will-...
I am not quite sure why Russia and China don't quickly dump their treasuries. They must, of course, have a good reason, but I wonder if the short term loss they'd take is really as bad as the heavier loss they will take if the US declares the obligations to a hostile state void...
War is economic. You win a war by making it impossible for your opponent to field their forces to oppose you. I think the Chinese proverb says something about first winning the war, and then fighting it.
I am not quite sure why Russia and China don't quickly dump their treasuries. They must, of course, have a good reason, but I wonder if the short term loss they'd take is really as bad as the heavier loss they will take if the US declares the obligations to a hostile state void...
Three reasons:
1. Too overt, but as the US pushes harder and harder, the overtness of such an act becomes less of a hindrance.
2. Economic losses to China and Russia would flow from such an act. Better to slowly sell them off, which i believe Russia is doing.
3. Right now the threat of doing so is leverage. Once done, it is done, no more threat.
thanks, SW - good stuff.
Which is to say, why waste resources when your opponent is doing a fine job all by himself... After all, you don't kick 'em in the teeth until they're Down...
No I don't agree.
On the forefront, I think some Chinese are very fluent on how the U.S. is.
And unfortunately, since elder worship and seniority reigns in Asian culture- I don't believe the aforementioned group has enough political leverage to explain anything.
If Japan does it, China will too says the oligarchy.
Russia on the other hand, I'm ticked at them for this.
And they with Israel and everyone else will play the law of moral relativity.
Are they confused that they're creating a monopoly of power in the U.S. where that monopoly of power is actually creating problems for the foreign government buyers of US Treasuries?
Or are they simply taking bribes to buy them then pointing the fingers at FIFA reps for taking bribes?
No seriously, the U.S. who isn't the bread basket for FIFA actually sent FBI agents to investigate this bribery case when ESPN probably did the same thing with the SEC in college ball.
And yes Russia and Qatar are being targeted for FIFA bribes(for obvious political reasons). They're going to yet cherry pick the law of moral relativitists and I will not defend them. I scorn them because the public funding via. seedy exhibition of nepotistic and corrupt "new trade theory" of institutionalized garbage has a monopoly of power over the private sector which funding is really discouraged. Thank you Clinton - Multilateral Investment Agreement in 1995 between the U.S. and China.
I know a Russian Princess who came here on a VIsa with a bachelors (or equivalent)- she doens't know what work is, and she gets unemployment benefits from the California system when people who live here legally actually worked and got screwed on unemployment when Russia's economy was doing much better than ours.
So the gubbermint of trashholes will make a stupid scene and waste our tax dollars on nasty methed out Kiev Nazis - who are indirectly funded by Russian lenders to the U.S. Treasury.
Global leaders are idiots. ALL OF THEM. Goldman Sachs could tell you.
gott keep the US dependent on mideast oil - energy dependence is such a good cover for our involvement in that part of the world... involvement that is plainly not all about energy, or bankers, but in large part about "remaking" the middle east to prevent any rivals to the US or Israel or the UK in any region.
The shale bubble will break those who own their debt ie banks. It will be yet another collapse of a market that people were too heavily levered in.
well, as someone who completes shale oil wells in south and west texas, they have plenty of fracked holes that just need drilling out and flowed back to begin ramping produciton back up. Not to mention the shut in wells that require assisted lift or more daily maintenance to keep flowing, but that can be reopened and producing basically at a moments notice.
I would think that as demand catches up to supply, you will see a price spike up to 80-85, the operators will re-hedge as far out as possible, and then production will again outpace demand, opec will try this ploy again, and we will see $20-$30 bbl oil.
on the plus side, every oil well in existence produces some amount of natural gas, nothing produces oil as a side effect. so in that respect oil production will not parallel what is happening with nat gas.
The narrative about shale is that second tier investors got shanked. Shale was always and remains a Ponzi scheme. Narrate your way around that one.
...as opposed to public equity markets, US gov credit, and hedge fund investing, or anything else for that matter, where second tier investors get first tier results.
I try not to argue with retards on the internet.
What happened to the thought that these shale holes have production that drops way faster than originally thought??
That would drive the US to get some political value by screwing the Ruskies when they can.... Once the word gets out about how quickly production from these shale holes drops off, the power is gone...
Remember there were these in depth meetings with the Saudis just before this happened. The FED just prints up a bit more to finance any risk the US Banksters had, and no cost.....
They are ramping up production in a struggle to keep their lines of credit from being yanked. The 'shale boom' catchphrase is cover for the scam of the century. Jed Clampit didn't get to Hollywood by squeezing black gold out of rocks.
The only entities making money - drilling services firms, banks and pump and dump venture capitalists. Maybe this article has something to do with the ad for 'oil and gas' investing that appears on the right of the ZH page I'm viewing.
..and production is rising from the completion of wells/fields that were already being put into service. There will be a decline in output over the next couple of quarters, and probably more so once the banks get itchy feet about loaning $ to a business venture that by definition can never turn a profit at the current price deck.
Go Saudi Arabia!
..and production is rising from the completion of wells/fields that were already being put into service. There will be a decline in output over the next couple of quarters, and probably more so once the banks get itchy feet about loaning $ to a business venture that by definition can never turn a profit at the current price deck.
Go Saudi Arabia!
The same rigs that produce oil produce natural gas. Plus the storage numbers are massive.
Drilling a well and capping it are two different things. I stop drilling because I am now getting oil. The only connection between the two is drilling is theoretical oil whereas pumping is actual oil.
My view is simple...the US consumer consumes far less oil these days. I fail to see the demand in this so called recovery. I would not be long oil.
The only reason the price is so high is because Russia and Saudi Arabia need the oil for their wars they are now fighting.
Of course they need dollars for their wars too.
I agree...tough news for the shale folks if Russia and SA have to produce dollars by pumping more oil though.
Same goes for Canada of course too who's currency has plunged this year too.
"...better efficiency" means even lower oil rices. Bring it on.
Sure, more efficient. Bakken barrels per day per well is steadily declining. Is Texas better?
Of course, knowing this would mean looking at the data, not the forte of too many.