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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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OPEC Expands Control Of Oil Markets As Shale Growth Stalls

  • U.S. shale may only add 500,000 bpd in 2023. 
  • A number of factors from labor shortages to lack of external capital to exhaustion of sweet spots constrain growth in the U.S. shale patch.
  • Goldman Sachs’s Jeff Currie sees OPEC’s control over oil markets growing this decade.

After a decade of exponential growth, the U.S. shale patch is no longer the swing producer on the global markets. That role is now back in the hands of OPEC and its largest and most influential members in the Middle East, analysts and industry executives say. 

From growth of over 1 million barrels per day (bpd) in oil production annually before the pandemic hit demand in 2020, the United States is now set to see the growth rate at half of that, at best, this year. Although most of the growth comes and will come from the shale patch, the pace of output increases has slowed, and some analysts have recently called the peak of shale production coming as early as 2024. 

A number of factors have combined in recent months to weigh on U.S. shale production growth – from capital discipline to labor shortages, from a lack of external capital to cost inflation and high interest rates, from exhausting prime locations to drill to steeper drops in well productivity over time. 

U.S. Shale Growth Underwhelming 

U.S. shale will still grow, even at lower rates, analysts say. But the Permian will no longer be the global swing producer it used to be before 2020 when U.S. producers plowed all their cash and took on more debt to “drill, baby, drill” every time oil prices moved higher. 

Last year, not even $100 oil tempted American producers. Supply chain bottlenecks, cost inflation, labor shortages, maturing asset base, and lower availability of capital have been the biggest drags on U.S. shale production over the past year, executives at E&P firms said in the Dallas Fed Energy Survey for Q4 last month.  Related: Venezuela’s Vast Oil Wealth Could Become The World’s Largest Stranded Asset

A total of 32% of E&P executives selected “cost inflation and/or supply-chain bottlenecks” as being the biggest drag on their firm’s production, 27% chose “maturing asset base,” and 16% indicated “availability of capital.” Other options each received 9% or less. 

“Geopolitical risk, economic uncertainty, material and/or labor shortages and an administration that is hostile to the industry have made it difficult to project what the next 12 to 18 months will be like for the upstream sector,” one executive at an E&P firm said in comments to the survey. 

According to the EIA’s latest Short-Term Energy Outlook (STEO), U.S. crude oil production is expected to have averaged 11.7 million bpd in 2022 and will average 12.4 million bpd in 2023, which would surpass the record high set in 2019. 

This may be too optimistic, some analysts and industry officials say.

U.S. oil supply growth will be modest this year, at around 400,000 bpd exit-to-exit at the end of 2023, according to Enverus Intelligence Research (EIR). 

Enverus expects global demand growth at 1 million bpd this year, half driven by the Chinese reopening. 

“Conversely, the combination of modest U.S. supply growth (0.4 MMbbl/d E/E), OPEC intervention and Russian sanctions prevents critical OECD crude, product and SPR inventory builds, leaving the market undersupplied if an anticipated pickup in the global economy materializes in the second half of 2023,” Enverus said in a report earlier this month. 

Analysts at Energy Aspects warned in October 2022 that U.S. crude oil output from shale basins could peak in 2024

“The aggressive growth era of US shale is over,” Scott Sheffield, CEO at the largest pure-play shale producer, Pioneer Natural Resources, has recently told the Financial Times.

“The shale model definitely is no longer a swing producer,” Sheffield noted. 

At the Goldman Sachs Global Energy and Clean Technology Conference earlier this month, Sheffield said that Pioneer had lowered its estimates for total Permian oil production from all operators to about 7 million bpd by 2030 from around 8 million bpd forecast about a year ago. The EIA estimates that the Permian currently pumps 5.5 million bpd.  

Many companies are running out of inventory and are moving to tier two and tier three inventory, Sheffield added. 

Shale growth will probably be around 400,000 bpd this year, down from 500,000 bpd-600,000 bpd Sheffield had predicted for the last 12 to 18 months. 

“And that will continue to decline over the next five years,” Pioneer’s CEO said.


OPEC Back In Driver’s Seat 

OPEC is now in the driver’s seat, and if oil stays around $75, the cartel will likely act to support prices, according to Sheffield.  

“They need oil to be at $100 a barrel or higher in my opinion. OPEC ministers are frustrated over the recent price fall. It’s understood. I think is going to change. If it stays too low, it wouldn’t surprise me if they have another cut. But they’ve got to wait till February 5 to watch the product ban on Russia,” he said at the Goldman Sachs conference.  

For Jeff Currie, global head of commodities at Goldman Sachs, the U.S. shale patch was the place to look for spare capacity before 2020, and it was capable of influencing oil prices when American oil production surged in the decade to 2020. 

“Today that flexibility is gone, pushing us back to the ‘old oil order’ of Opec dominance,” Currie told FT. 

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on January 18 2023 said:
    Before the pandemic in 2020, US shale oil was the spoiler rather than the swing producer encouraged by successive US Administrations particularly the Trump administration to flood the market even at considerable loss so as to undermine OPEC’s policies of maintain stability of both the market and prices.

    In the aftermath of the pandemic, OPEC+ has taken over control of the market and has emerged as the most influential player in the market. Its effectiveness and evenhandedness earned it the respect of the world.

    On the other hand, US shale oil is a spent force incapable of raising production, only giving a multitude of excuses for its failure.

    My projection of US oil production in 2023 ranges from 9.8-10.3 million barrels a day (mbd).

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • independence01776 d on January 18 2023 said:
    Hard to entice investment in a declining industry. Oil production peak demand was 2019. Since then Oil has bounced back up to near its peak production from pandemic lows, but will trail off in 2023 due to slowing economies. Oil prices near $100 per barrel, just adds to the incentive for nations to lower oil consumption and shift faster to renewable energy and electric cars and this means long-term oil prices at over $90 per barrel are not sustainable. Prices will continue a gradual downward slide over the next decade.

    OPEC has control over supply, as they always have, but has not had pricing power for two decades. However, price control is no longer a matter of US shale, it's between fossil fuels and renewables and the outcome is renewables are winning the gap will only get wider as manufacturing scale continues to grow and technology advances. Oil is set for a demand decline until it is no longer relevant in a decade, two at most. Oil producing nations run by autocrats that are highly dependent on oil for govt. revenues are going to find tough sledding and they are completely unprepared for this. The social upheaval sadly may break most of these nations.

    As for oil prices, when accounting for inflation they have continued a long decline for the past 15 years. There's no long term pricing power going forward given the replacement of renewables for oil is well underway and accelerating. As Russia has proven, going to war only forces a nation to lower its price for oil as buyers run the other direction.

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