The collapse of oil prices late last year, along with pressure from shareholders, has led to a slowdown in the U.S. shale industry.
The EIA released new monthly data on March 29, which revealed a decline in output of about 90,000 bpd between December and January, evidence that shale drillers slammed on the breaks after oil prices fell off a cliff in the fourth quarter. The 90,000-bpd decline came after a rather meager 35,000-bpd increase the month before, which was the weakest increase in months.
But the U.S. shale industry is facing more headwinds than just a temporary dip in oil prices. Shareholders have run out of patience with unprofitable drilling, and are demanding returns, which is tightening the screws on less competitive companies and forcing spending cutbacks across the board. More worrying for the industry is a growing recognition of the "parent-child" well problem - the unexpected poor performance of subsequent wells drilled in close proximity to the original "parent" well.
These obstacles are beginning to pile up. Schlumberger and Halliburton, the two top oilfield services companies, have predicted that shale drillers will be forced to collectively cut spending by more than 10 percent this year.
The slowdown could put some bullish pressure on the oil market, already suffering from outages in Venezuela, Iran and coordinated cuts from OPEC+. While U.S. inventories rose unexpectedly last week, much of the increase can be chalked up to turmoil in the Houston Ship Channel following a major fire at a petrochemical facility.
Indeed, some analysts see significant stock declines in the next few weeks. "The most visible inventory levels in the world…will fall victim to a potent mix of Venezuelan supply disruptions, a Houston Ship Channel chemical spill, and an uptick in refining runs," Barclays wrote in a note on March 29. The investment bank sees WTI rising to an average of $65 per barrel this year. Related: Trump Battles For Key Oil & Gas Projects
Adding to the bullish momentum is the rather sharp fall of 8 oil rigs last week, the sixth consecutive week of declines.
However, it is not guaranteed that the slowdown will last for long. Data firm Kayrros says that the production decline will be "short-lived," and that there are already signs that industry activity picked back up in the last few months. "This drop, which tracks past seasonal behavior, follows a plunge in well completions measured by Kayrros in December via a combination of satellite imaging and advanced processing," Kayrros wrote in a report. "But the same proprietary technologies show well completions bounced back in January and February, presaging a rebound in production." In fact, Kayrros says that Permian production could once again exceed expectations this year.
Still, the pause in the shale patch is fueling higher prices. "We expect Brent to move into the $70-80 a barrel range," said UBS's Giovanni Staunovo, according to the Wall Street Journal. Related: Reuters: OPEC's Oil Production Drops To Lowest Since 2015
At the same time, other signs of tightening abound. A Reuters survey shows that OPEC's production fell to four-year low in March, as Saudi Arabia cut below its requirement and Venezuela posted deeper supply losses. OPEC produced 30.40 mb/d last month, a decline of 280,000 bpd from the month before. Notably, Venezuela saw 150,000 bpd go offline, a volume that will not easily be recovered.
Crucially, fears of an economic slowdown have abated a bit recently. New data from China showed the largest monthly increase in the manufacturing purchasing managers' index since 2012. The data diminished concerns about China's impending slowdown. Moreover, there is hope that the U.S.-China trade talks lead to a breakthrough and the removal of tariffs, which would erase one of the largest downside risks to the oil market.
In early trading on Monday, WTI jumped over $61 per barrel and Brent moved up towards $69 per barrel. "Gaining approx. 27 percent, Brent oil enjoyed its strongest start to the year since 2005 in the first quarter," Commerzbank wrote in a note. Although the bank cautioned that the upside for prices is somewhat limited, the Brent futures curve is taking on a bullish tinge. "OPEC's production cuts are tightening supply on the world market. As a result, the Brent forward curve is in backwardation throughout."
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
The first is a technical risk. With the price of oil climbing so quickly in the last few days, the temptation will be there for many traders to cash in on their gains, resulting in a meaningful drop in the price of oil as those following the leaders race for the door.
The second risk is President Trump and his tweets. As the price of oil approaches $70/barrel Brent, expect him to become more vocal about his desired price of oil, along with reminding key OPEC members who defends their borders.
The third is the US/China trade war. On the surface it seems as if things are on the right track in those negotiations. Below the surface the world is encouraging Trump, even his political enemies, to not settled for a poor deal. I see a trade deal in more trouble than current headlines suggest.
The fourth is the price oil itself, which will encourage US drillers to pump more, and users of oil to use less, which will put downward pressure on the price of oil.
And despite tweets by President Trump about the need for lower oil prices, it is very unlikely that Saudi-led OPEC will comply. Saudi Arabia will not come this time to his aid as it did in June last year when it agreed to raise its oil production to offset an expected decline in Iran’s oil exports and ended up with a collapse of oil prices by 43% from $87 a barrel to $50 and with the Trump administration issuing sanction waivers to eight of Iran’s biggest buyers of its crude.
Surging oil prices are bolstered further by numerous authoritative reports of a slowdown in US oil production and a projected production decline of 1-2 million barrels a day (mbd) mostly from US shale oil production by 2020. This could translate into a US production range of 10.0-11.0 mbd in 2019 and 11.0-12.0 mbd in 2020.
Still, the US Energy Information Administration (EIA) is adhering to the ludicrous projection that US oil production will overtake the combined production of Russia and Saudi Arabia by 2025 despite the fact that an overwhelming number of analysts with the exception of the International Energy Agency (IEA) and Rystad Energy which are in cahoots with the EIA dismiss such a claim as self-delusional.
Oil prices are probably headed to $80 a barrel or even higher this year. This is the level of prices the Saudi-led OPEC needs to balance the budgets of its members.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London