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Julianne Geiger

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Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.

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U.S. Shale Could Be The Biggest Winner Of The Latest OPEC Cuts

OPEC, and especially OPEC+, has always seemed to be at odds with the U.S. shale industry. From the drastic oil embargos of the ‘70s to the all-out oil price war of 2020, OPEC policies have threatened to upend the United States’ use and production of crude. But the group’s latest policies may be a lifeline for U.S. shale, which is struggling under the weight of the new pandemic world order. 

Frenemies at Last

OPEC and the United States were once at bitter odds. In the days of the oil embargo, the situation was sticky and heated. Today, it’s more of a smoldering competition. OPEC--and now OPEC+--is trying to hang onto its own market share while maintaining adequate price levels for its members’ oil revenue-dependent budgets. It’s a lot to juggle. US shale, on the other hand, is operating in an every-man-for-himself mode, with less efficient producers folding under the crushingly low oil prices, and more efficient producers picking up assets for a song. 

There is no question that US shale has increased its market share over the last few years. The United States lifted a 40-year ban on oil exports at the end of 2015. At that time, the global oil market was already saturated, and that’s really when the battle for the market share began. 

The market that was most affected was the U.S. market, which used to get much of its oil from OPEC nations. Now, the United States is basically a net oil importer--importing some grades, and exporting others. U.S. oil is exported mostly to Mexico, Canada, and the largest destination --China. That last one must hurt for OPEC. India, too, takes a fair amount of U.S. crude. In October 2020, Asia’s second-largest crude importer took nearly a half a million barrels per day from the United States. 

And while this change was inspired in large part by the lifting of the export ban, it would not have been possible without OPEC’s help in the form of organized production cuts, which began just months after the U.S. lifted its export ban.

OPEC’s Prognostication on U.S. Shale

That OPEC’s policies are aiding U.S. shale isn’t a secret, either. OPEC itself now sees U.S. shale’s supply outlook as slightly more “optimistic,” OPEC’s latest Monthly Oil Market Report showed on Thursday. And some of those improvements in the supply side of the equation for U.S. shale are already upon us. Related: Biden's Boom: The $30 Trillion ESG Sector Is Set To Explode In 2021

“Market conditions have improved for US shale as oil prices have moved into a range where output is likely to recover at a higher-than-expected rate in 2H21,” the MOMR reads in part, adding that the US liquids supply forecast has been revised upward by 100,000 bpd, to average 18 million bpd in 2021. 

EIA’s Dim View

On January 12, the Energy Information Administration forecast a bleaker picture for the US oil industry. For 2020, the EIA now estimates that US crude oil production fell from 12.2 million bpd in 2019 to just 11.3 million bpd. For 2021, it expects that figure to fall to 11.1 million bpd, before rising to 11.5 million bpd in 2022.

That the EIA does not need US production picking up more than 400,000 bpd on average this year is noteworthy. 

OPEC is Doing it Again: The $56 Mark

For everything that OPEC has done for US shale up to this point, the industry surely thanks it. But it looks like OPEC is taking even more strides to do it again. While Russia is keenly aware of this unfavorable position, the group is nearly powerless to maintain prices for themselves without also opening the door for U.S. shale. 

Oil companies in the United States Tenth Federal Reserve District (Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and some parts of Missouri and New Mexico) reported in the fourth quarter of 2020 that they needed oil prices to be at $56 for a “substantial increase in drilling” to occur, according to the Kansas City Fed. 

In just the first two weeks of this year alone, the price of WTI has risen from sub $48 to more than $53--well on its way to that sweet spot. Most--if not all--of this gain has to do with Saudi Arabia’s promise to OPEC and OPEC+ that it would cut another million barrels of oil production per day in February in March in an effort to bolster prices. The market had expected a small increase. 

Meanwhile, Russia was allowed a small increase in production--a sign that at least one powerhouse is done holding that door open for US shale, who only cuts production on a company by company basis when it is uneconomical to do so (and sometimes not even then). 

But this time around, US shale companies are expecting not to lift production, but to rake in the extra profits from the increase in price and pay down their debt and give more back to investors. 

That it might be different this time around may be what saves OPEC from losing even more market share. 

By Julianne Geiger for Oilprice.com

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Leave a comment
  • Gerard Remy on January 15 2021 said:
    Shale producers in the US knows that if they attempt to increase oil production to capitalize on rising oil prices, they will in effect cause a decline in price and then its back to square one exacerbated by the fact that the industry is yet to provide a fair return to the investor
  • Mamdouh Salameh on January 15 2021 said:
    Since its inception, the US shale oil industry has been behaving as a parasite living in the body of OPEC and sucking the life out of it. Before, the COVID-19 pandemic, the work ethics of US shale oil drillers were characterized by greed and irresponsible production aimed at undermining OPEC+ efforts to stabilize the global oil market and prop oil prices and also gain market share at its expense but OPEC+ has won a decisive victory against US shale oil.

    With increasing number of bankruptcies and with access to capital getting tighter, US shale oil production will neither have any prospect of growth nor a comeback soon (or may be ever) to previous levels. It hasn’t only lost a sizeable production as a result of the pandemic but also its importance to the global oil market.

    OPEC+ recent production cuts have extended a lifeline for U.S. shale drillers who are struggling under the weight of the new pandemic world order. Let’s hope that they have this time learnt the lesson of not to undermine OPEC+ efforts and to work on the fair principle of live and let live.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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