While the June oil production data is still pending, it is safe to say that the June oil output from US shale producers - estimated today by the EIA at 5.348mb/d - will post the first double-digit production growth since July of 2015, when oil prices tumbled and a substantial portion of US production was briefly taken offline.
Chart courtesy of Forge River Research
Indicatively, while over the past year total U.S. production is up roughly 525kb/d, virtually all of it, or 98.5%, is the result of horizontal rig production in the Permian Basin, where output is up by 507kb/d.
The Permian basin has been leading the increase in horizontal oil rig count (+178%)
More important, however, is that according to the latest EIA Daily Prodctivity Report forecast released today, in July total shale basin output is expected to rise by 127kb/d in one month, hitting 5.475 mmb/d, and surpassing the previous record of 5.46 mmb/d reached in March 2015.
Needless to say, this is bad news for OPEC, which continues to price itself out of the market by not only keeping prices high enough to make production profitable for US companies, but by allowing shale to capture an increasingly greater market share.
Worse news is that shale is just getting started: both the Energy Information Administration, OPEC and the International Energy Agency have chronically underestimated the contribution of U.S. crude oil supplies in their forecasts. As Shale River notes, each has significantly increased their estimates for 2017 U.S. crude oil production during the year, with recent upward revisions larger than prior increases. In fact, the EIA recently conducted its 11th consecutive upward revision of its 2017 estimate.
But the worst news - for OPEC yet again - is in the long-term, where if 5.5mmb/d is considered a record, just wait until shale hits more than double that amount, or over 12mmb/d, which Goldman expects will be achieved some time in the 2020s.
The reason: shale breakeven costs are dropping on a monthly, if not weekly basis, and which over the next 4 years Goldman expects will plunge to prices where US production will become competitive with the lowest-cost OPEC producers: Saudi, Iran and Iraq.
Impossible? The chart below showing the collapse in breakevens in the past 9 years suggests otherwise:
Here is Goldman:
We believe the Big 3 shale plays (Permian Basin, Eagle Ford Shale and Bakken) combined with Cana Woodford plays (SCOOP/STACK) and the DJ Basin can together drive on average 0.8 mn bpd of annual production growth through 2020 and 0.7 mn bpd of annual production growth in 2021-25. We see production plateauing towards the end of the next decade at present. Importantly, as described below, we still see room for additional productivity gains; our estimates incorporate expectations for 3%-10% productivity gains per year through 2020.
While rest of the world is finding ways to move breakevens down towards $50/bbl WTI, we still see shale as the dominant source of growth and as a critical source of short cycle production. Our global cost curve from our recent Top Projects report shows continued decline in shale breakevens, though at a smaller pace vs. in past years. Outside of shale, we increasingly see industry – majors, national oil companies (NOCs) and governments – working to accommodate new projects that break even at $50/bbl WTI or less with a goal of becoming more competitive with shale. This largely is occurring through a combination of improved tax/royalty terms by host governments, more limited scale by producers (smaller projects that come online more quickly) and cost reduction/efficiency gains. We still see production from new projects falling off towards the end of the decade as a result of the reduction in investment after oil prices collapsed post-2014. As such, we expect shale will continue to be a critical source of marginal supply because shale along with OPEC spare capacity are the principal sources of short-cycle supply.
The bad news for OPEC is that it is trapped when it comes to oil prices: on the bottom by plunging state revenues and booming budget deficits, which spell out austerity, social instability and eventually revolution if prices are not boosted, and on the top by shale technological advances, which consistently reduce breakeven prices, and allow shale to stale market share from OPEC the longer prices are kept artificially high.
The solution, short-term as it may be at least according to Goldman, is that oil prices "need to stay lower for longer." That however is a non-starter with Saudi Arabia, which for obvious reasons, is rushing to IPO Aramco before math and physics finally declare victory over cartel-controlled supply, and oil prices crash. It remains to be seen if it is successful.