The growth of shale oil production in the United States will not cause a prolonged decline of oil prices and does not make the Organization of Petroleum Exporting Countries (OPEC) strategy to reduce oil production pointless, according to experts interviewed by TASS. In their opinion, in the coming weeks oil will return to $55 per barrel, which is in the interests of both American and Middle Eastern producers.
The world’s largest oil and gas conference CERAWeek in Houston was held last week on the backdrop of a collapse of oil prices. The price of Brent crude oil dropped to $51.7 per barrel and remained at this level a week after the conference ended. The price fell after the Minister of Energy, Industry and Mineral Resources for Saudi Arabia Khalid Al-Falih made it clear on the sidelines on the conference, Saudi Arabia, which had exceeded its quota for cutting production, “will not bear the burden of free riders”, referring to producers that do not participate in the agreement.
Earlier, CEO of the largest US oil and gas company ExxonMobil, Darren Woods, said that the United States is currently experiencing the second shale revolution, and as a result, the US will turn from the largest oil importer to an exporter.
“Nothing like a few days in Houston to realize that OPEC’s strategy is doomed for now. Permian costs (the Permian Basin is one of US centers for shale oil production – TASS) are low and production is hedged,” one of the forum participants, London-based oil market analyst Jean-Francois Lambert wrote in his Twitter.
So was Rosneft’s CEO Sechin right when he said that neither OPEC, nor shale oil producers are the oil market regulator?
Not everything is what it seems
“It is too early to talk about the OPEC strategy not working, because the first quarter is traditionally weak for oil consumption. We will begin to see how effective it is starting from the end of March. If at the time oil reserves begin to fall, both globally and in the US, it means it works,” leading analyst at Bank of America Merrill Lynch Karen Kostanyan said.
According to him, expectations of growth of shale oil production was already priced in the market and and in OPEC’s strategy. “The only question is the reaction of shale oil producers. So far, we expect that their production will increase by 650,000 barrels from January to December. If the global demand grows by 1-1.5 mln barrels, and OPEC cuts production by 1.8 mln barrels, then you know, there is a deficit,” he added.
“We do not consider the strategy to be doomed,” Vice President at Wood Mackenzie Alan Gelder told TASS. “The recent growth in US inventories, in part due to US supply growth, suggests to us that OPEC needs to extend its agreement beyond six months to ensure global oil inventories decline to establish a firm foundation for oil prices about $50/bbl. The key aspect to watch over the coming weeks/months is how the cost inflation in US tight oil production impacts the addition of further rigs and so the sustained growth in supply. There is mounting evidence that costs are increasing in the production of US tight oil, which dampens supply growth. Our expectation is that the addition of further rigs is limited for Q2,” he added.
“Shale oil producers are very serious players who are able to exert pressure, but only within the boundaries modern technologies set for prime costs,” analyst at Finam Alexey Kalachev said.
Back to the comfort zone
Kostanyan associates the recent drop in prices with a technical panic reaction of the market, and he believes that in the near future, “everything should recover.” Oil prices will return to their previous levels and will be traded within $55-60 per barrel this year, Kostanyan said.
“You cannot go higher because production is increasing, and you cannot go lower, because production is declining. This range – $45-55 – will be long-term until something significant happens, some kind of war or revolution,” Kalachev said.
Prices will return to the level of $55 per barrel “towards the end of Q2 2017, as US crude inventories fall as refinery runs increase to satisfy US consumer demand for refined products, notably gasoline,” Wood Mackenzie’s Alan Gelder believes.
Dialogue cannot be avoided
“It seems to me that Al-Falih has warned shale oil producers. It is right that he said it now, because it would be silly to increase production in order to crash oil prices again,” Kostanyan said, assessing the statements of the Saudi Arabian Minister during the conference in Houston.
“If US tight oil growth remains strong and not commercially rational (so reflecting over-investment through poor financial discipline by either the companies, their financiers or hedging counterparties), then OPEC may well not extend its agreement, which could lower prices further,” Gelder noted. This scenario would not suit either US or Middle Eastern producers, experts interviewed by TASS agree.
“If the growth of shale mining remains strong and economically inexpedient (with excessive investments, weak financial discipline in companies), OPEC will not renew the agreement and oil will collapse again,” Gelder added. Such a scenario would not suit either American or Middle Eastern producers, analysts have told TASS.
“At present, the oil market is trying to establish a direction and so is learning the new relationship between the oil price and US tight oil supply growth,” Gelder concluded.
As though to confirm these words, on March 15, after the meeting between President Trump and the deputy crown prince of Saudi Arabia Mohammad bin Salman Al Saud, the White House reported that both parties agreed to conduct active consultations in order to stabilize supply and avoid price volatility in the oil market. Shortly before this, OPEC Secretary General Mohammad Barkindo said that the cartel and American producers had established a dialogue.