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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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U.S. Record-Breaking Oil Output One More Blow to OPEC

  • The EIA reported last week that average daily production in September had remained unchanged from August when it hit the record-high rate of 13.24 million barrels.
  • One analyst has already suggested that the Saudis’ only move in the current situation is to open the taps and try to kill U.S. shale all over again.
  • OPEC will survive lower prices until the realization that there is less physical oil on global markets kicks in
Roughnecks

Record crude oil production in the United States is serving a fresh blow to oil bulls and OPEC, just as the cartel was trying to push benchmarks higher by adopting deeper production cuts.

The EIA reported last week that average daily production in September had remained unchanged from August when it hit the record-high rate of 13.24 million barrels. This is happening despite cost inflation and lower international oil prices. And U.S. shale drillers have no plans to drill less.

The situation is perhaps worryingly similar to 2014-2016 when oil prices took a dive, falling by 70% when the Saudi-led OPEC hit back at U.S. shale by boosting production to tank prices and sink as many U.S. producers as possible.

At the same time, however, the situation is markedly different in several ways. U.S. producers have consolidated and this has made many more resilient to price wars. At the same time, Saudi Arabia and its Gulf allies are probably more risk-averse than they were back in 2014: that oil price crisis prompted Gulf governments to adopt austerity measures for probably the first time in their history. They did not like it.

One analyst has already suggested that the Saudis’ only move in the current situation is to open the taps and try to kill U.S. shale all over again. However, this is a sort of a nuclear option that would hurt Saudi Arabia and its OPEC friends as well. But they do have another option: keep cutting. Related: Price Cap Has Fallen Short of Its Potential Despite Costing Russia $36 Billion

The market did not react to the latest production cut announcement because it was expected. Indeed, it was so copiously reported on, nothing short of a massive production cut would have impressed traders—especially when most of them are computers.

The oil market is distorted right now, with the link between futures benchmark prices and physical supply and demand quite broken. Given time, however, this link will reestablish itself as it has always done. And then U.S. shale might become a bigger problem for OPEC. Then again, it might not.

U.S. drillers have demonstrated in the past couple of years that the days of “Drill, baby, drill” are over. Discipline and caution in production growth are the new leading themes in the industry. Indeed, much of the increase in production this year, according to executives, is due to better well productivity and not more drilling.

All this suggests that production growth is no longer the end goal of the industry. Longevity is, as suggested by the wave of large-scale acquisitions in the shale patch, focusing on the Permian. And longevity does not go hand in hand with constantly growing production. Longevity goes hand in hand with improved long-term planning, which the leaders in the industry are no doubt doing.

OPEC will survive lower prices until the realization that there is less physical oil on global markets kicks in. And it will kick in as it always does. Because something many often forget is that not all oil is made equal. Record U.S. production could—and does—affect benchmark prices but that does not mean that U.S. oil can fully replace OPEC—and Saudi—oil. The market wants both, and it still wants a lot of both.

Meanwhile, however, OPEC is not just sitting and watching how U.S. shale drillers boost output. It just accepted Brazil as a member, although the Brazilian side made sure to note it will not be a full member and will not take part in production cuts. Maybe not now but at some later point, as Reuters’ John Kemp suggested in a recent column detailing OPEC’s track record of seeking greater clout over global oil markets through expansion among non-U.S. producers.

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By Irina Slav for Oilprice.com

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Leave a comment
  • Carlos Blanco on December 06 2023 said:
    It's about time. OPEC has been irrelevant in the oil market. It's always been a political vehicle for the Saudis. The other members have shown some resentment and they would have been better off by being outside the cartel. They should not let one country dictates how they should make an income from their resources.
  • Mamdouh Salameh on December 06 2023 said:
    Many veterans of the US shale revolution will agree with me that this isn’t record breaking US output but hype breaking record by the US Energy Information Administration (EIA).

    As such it is neither a blow to OPEC nor there is any need for Saudi Arabia to flood the market.

    At best US production could be estimated at 10.0-11.0 million barrels a day (mbd).

    Dr Mamdou G Salameh
    International Oil Economist
    Global Energy Expert
  • bill vickers on December 06 2023 said:
    That and the lies being told by IEA and EIA and the algorithmic trading which I am sure includes buying and selling to themselves to move the price where the hedgies want it.
  • John Galt on December 08 2023 said:
    Just imagine what it would be like had the election not been stolen? Keystone pipeline pumping nearly 1 million bbls/day to Houston, oil production would be vastly higher than just engineering innovation on the same existing wells.

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