OPEC's War Against Shale Is Far From Over

Tyler Durden's picture

Authored by Gregory Brew via OilPrice.com,

Despite the recent market rally and current bullish streak in oil prices, the years-long competition for market share between OPEC and U.S. shale producers shows no sign of abating, and will likely continue for the next several years at least.

That was OPEC’s conclusion in the group’s World Oil Outlook released this week. OPEC believes U.S. shale production will grow faster than previously expected, reaching 7.5 million bpd by 2021, an increase of 56 percent from the group’s estimate last year.

According to OPEC calculations, current shale production in North America is approximately 5.1 million bpd—an increase of 25 percent from a year ago.

Despite low prices, shale has shown remarkable resilience and an ability to bounce back from downturns.

OPEC expects shale to finally taper off by 2025 and decline by 2030, by which point OPEC will have increased output by eight million bpd, from 33 million bpd to 41.4 million bpd.

By 2021, oil demand will increase by 2.3 million bpd, a fairly bullish projection. OPEC expects fierce competition with North American shale producers for market share, particularly when regulations on shipping fuel take effect in 2020, increasing refinery demand for fuels that shale producers will be well-positioned to provide. Related: The U.S. Export Boom Goes Beyond Crude

Total U.S. production will increase by 3.8 million bpd by 2022, chiefly on the back of increased shale output, equal to seventy-five percent of production growth outside the fourteen members of OPEC.

That growth will be front-loaded, says OPEC, as drillers seek out new fields and aggressively exploit current shale deposits. Yet OPEC admitted that shale will capture more market share in the short term, likely out-competing OPEC output. The group will probably commit to an extension of production cuts when it meets on November 30, and those cuts could extend to the end of 2018 and beyond, in order to raise prices.

But no one is tying the hands of shale producers, who are free to pump as much as they want. Higher prices are a powerful incentive for output to increase, with inventories rising unexpectedly this week by 2.1 million barrels after steady declines for the last two months. U.S. production, according to the EIA, rose by 67,000 bpd in the first week of November, rising to 9.62 million bpd.

Shale looked like it was slumping earlier this year. The rig count has steadily fallen since August, despite the increase in prices. Total production peaked in mid-2015 and then experienced a steady decline to August 2017.

 A sudden increase could be possible if prices fix above $60, as many now predict, but it could take some time to translate into higher production.

OPEC is leaving the door open if it extends cuts—a tactical move that its leadership probably knows will cost it market share in the near term. Yet not everyone thinks the extension is a done deal. The head of Citigroup Inc. noted that hedge funds are banking on an extension before it becomes a reality. If tight market conditions emerge in 2018, Citigroup thinks U.S. shale will surge again, cutting back the balance put in place by the OPEC cuts. While the OPEC cuts are likely to be extended, Citigroup doesn’t see them lasting through to the end of 2018.

In advance of the OPEC meeting, expectations about a “fair” might have to change. A year ago, most OPEC producers would have been happy with $50, but now the expectation is that Brent will hit $70 by the end of the year. For OPEC states that have struggled for the last few years with budget deficits, the promise of higher prices is an immense temptation to cheat on their production quotas and break compliance with the cuts.

OPEC greed, increasing shale output and lower-than-expected growth could cause the price to fall again sooner rather than later. Then again, a sudden spike in geopolitical volatility in the Middle East or Venezuela could reduce output and tighten markets sooner than expected.

OPEC anticipates a fierce battle ahead with U.S. shale. Nevertheless, the group has much to be thankful for, as prices have recovered and markets appear to rebalance. Despite Citigroup’s skepticism, it’s likely OPEC leaders will soon agree on a further extension of cuts. While this could leave the door open to another surge in shale production, OPEC appears confident that, in time, the threat from shale will recede.

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umdesch4's picture

Yes, but what about Venezuela going into default this morning? That's gotta be a factor in any analysis like this, I'd think.

Tugg McFancy's picture

Wrong and the chart above is bullshit. Production has plateaued since June.

natxlaw's picture

(To the tune of "Them Bones")

The OPEC they support the Petro Dollar,

The PetroDollar pay for the ZIRP bonds,

The ZIRP Bonds fund all the shale shit.

The shale oil bankrupts the OPEC.

The OPEC they a buncha, Dumbass

JibjeResearch's picture

Fuck Oil..

Can you just let the China's solar panel flood the US Market.... or make it ourselves.....

I'll buy hundreds..... 

 

gizmotron's picture

Fuck Oil, yes. But solar panels aren't going to displace oil, at least not until EVs reach critical mass, and that's still 15+ years in the future. Probably more like 20-25.

MuffDiver69's picture

Pickens said seventy December of last year. Not sure that high without a conflict,but I do believe that or sixty etc is what it will be...It makes sense and we are keeping a solid balance of Saudi and other OPEC oil in our refineries..It’s as if Tillerson and the Arabs know a market will work over cutting and pumping cycles..This is something to keep in mind when an Oil man is Secretary of State and it was not a coincidence he was chosen...Writers should keep this in mind..

Tugg McFancy's picture

Another article based on weekly numbers that are routinely pulled back 250-300k per day when the monthly comes out.

 

Sapere aude's picture

Boring. Why correlate inventory with production. It has no relationship whatsoever.

 

Inventory can be increased or decreased simply by purchasing more or less oil...purchase more inventory rises.

 

That is why its such a crock of brown stuff for ZH and others to constantly mention inventory as it is a false price mechanism designed in the main to reduce prices simply by buying more oil.

 

How many of you can go to your store and stay you are all buying more beef, so the beef inventory you have has risen and then expect them to reduce the price?

 

gizmotron's picture

GLobal oil demand will continue to rise for at least 15-20 years while the cost of extraction will also continue to rise. 5% of all "cheap oil" rigs shutter every year. They are replaced by "hard to get" oil (polar, deep water, shale). Oil at $50 is a screaming bargain. U.S. shale supply will peak around 2022. GLobal shale supply, I'm not sure. But the trend is clear. Oil remains a bargain. And one little international or middle-east regional skirmish will send it soaring into the $150 range.