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The Petroleum Minister of Nigeria, Emmanuel Ibe Kachikwu, has warned that OPEC will not allow U.S. shale drillers to “sabotage” the production cut agreement that the cartel extended by nine months last week at their Vienna meeting.
The warning did not elaborate on what OPEC’s steps would be to combat such acts of “sabotage” by the hands of independent US shale producers.
The agreement, solidified last week, will keep about 2 percent off global supply, but international market reaction was underwhelming, and Brent and WTI prices have been sliding.
Since U.S. producers haven’t signed on to any sort of production cut agreement, “sabotage” may be a bit excessive a qualification for what shale boomers have been doing ever since prices started recovering from the lows they hit in early 2016: expand production as fast and as much as they can so that, among other things, they can repay the debts they’d accumulated in previous, fatter, years.
Chances are that these producers will not stop doing this just because OPEC has decided to prolong the agreement. Yet they may become warier of ramping up production too quickly. As Continental Resources’ Harold Hamm said earlier this year, uncontrollable output increases could drive prices into the ground again.
So, it is in the shale producers’ own interest to not overdo things, especially now that some analysts believe that costs in the shale patch have bottomed out and there is nowhere lower to go.
The general OPEC opinion seems to be that if prices stay between US$50 and US$60, shale output will not grow too much. Judging by the rate at which shale producers have been adding drilling rings in the last few months, this may not be the case. In some parts of the Permian costs have fallen to as little as US$35 a barrel.
Besides, shale oil is not the only OPEC enemy. There is also deepwater oil, where costs have been declining as well. In fact, some observers believe deepwater oil could soon become competitive with shale – that would be just more bad news for OPEC.
By Irina Slav for Oilprice.com
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Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.