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U.S. Shale Is Turning Up The Heat On OPEC

Oil Rig

OPEC has been restraining production since the beginning of the year, after a group of cartel members teamed with Russia and other non-OPECs and agreed to production cuts last November. In total, the OPEC group targeted production reduction of 1.16 MMBOPD, with an additional 558 MBOPD of cuts from non-OPEC countries.

(Click to enlarge)

Projected shale production growth through Mar. 2018: EnerCom Analytics; underlying basin map: EIA

Generally speaking, OPEC has delivered on its promise.

Saudi Arabia cut its output beyond its pledge to make up for less-than-wholehearted commitment from several other members. Non-OPEC members did not always deliver on promised volumes, but they did at least cut production somewhat.

The cuts had mixed results, and did not quite achieve the group’s goals.

Oil prices did increase immediately after OPEC’s announcement, and stayed above $50/bbl WTI for the majority of the time since. However, WTI near term contracts today are trading $49.27/bbl.

(Click to enlarge)

5 Year WTI Price Chart: Quote Media

WTI has not been above $50/bbl in almost a month. The cuts, then, have only slightly boosted oil prices, and even this boost has not been sustained.

Taking down the global inventory was the goal

A reduction in global inventories is the claimed main goal of the cuts, which has partially occurred.

Inventories in the U.S. have decreased somewhat, and are at least within the five-year range again. According to the EIA, the current crude oil inventory is over 522.5 million barrels. This is 4 percent below the 543.4 million barrels in storage at this time last year, but is still 19 percent more than the five-year average for this point in the year.

Global inventories are declining, but not as quickly as expected. This has led OPEC and non-OPEC countries to believe extending the cuts is needed to bring markets to balance. Oil ministers from many nations have expressed support for cuts, and it seems likely that OPEC will decide to extend cuts through March 2018, another nine months beyond the current agreement.

U.S. production growth already wiped out 20 percent of cuts

U.S. shale producers, by contrast, have stepped on the accelerator. Activity in the Permian has skyrocketed, and most companies are predicting double-digit production growth this year. Oil traders are no longer worrying “Will OPEC cut production?” but are now asking “Will cuts matter?”

Related: Oil Prices Set To Rise On Back Of OPEC Deal Extension

Between member and non-member production, OPEC agreed to about 1.72 MMBOPD of reductions in oil output. According to the EIA, U.S. crude oil production was 8,780 MBOPD in December 2016, before the cuts took effect. Since then, U.S. production of crude oil has grown to about 9,160 MBOPD in April, an increase of 325 MBOPD. U.S. growth, therefore has wiped out about 20 percent of OPEC’s efforts.

American shale producers are far from done: here’s what’s coming

Companies seem to be very happy at $50/bbl oil, and growth is expected to continue as long as WTI stays in that range.

According to the EIA, U.S. production will rise in almost every month in the next two years, as improved technologies and techniques allow companies to remain economic.

By March 2018, the end of the proposed extension of cuts, the U.S. is projected to be producing 9,880 MBOPD, up 1,100 MBOPD from December 2016. If the agency’s U.S. production numbers hold, this would wipe out almost all of OPEC’s cut production, leaving OPEC members with less market share and little to show for it.

(Click to enlarge)

Source: EnerCom Analytics

Permian

Much of the U.S.’s production growth will come from the Permian, where multiple stacked pay intervals have made the basin the belle of the ball for unconventional producers.

According to EIA estimates, Permian production grew from 2,111 MBOPD in December 2016 to 2,360 in April. Permian production has grown by an average of more than 60 MBOPD each month since December, and shows no signs of slowing down. If this growth rate is sustained, and most individual Permian players believe that they will continue their growth rates, the Permian will be producing over 3,030 MBOPD by March 2018.

Bakken

In the Bakken, production has been essentially flat in 2017, except for recovering from a brief dip in production in December and January. It seems likely that this will remain the case, as most companies have shifted capital to more economic plays. Multiple stacked pay opportunities are alluring. Unless circumstances change significantly, Bakken production seems likely to stay around 1,030 MBOPD in the near future.

Related: Iraq Agrees With Deal Extension, But Boosts Oil Exports To Record Levels

Niobrara

Niobrara production has been growing slightly, at about 7 MBOPD per month since December. However, it is not clear if the recent home explosion in Firestone, Colorado, will have any long-term effects on production. We assume new laws in the wake of the disaster will somewhat hinder growth, but not stop growth entirely. If this is the case, Niobrara production could reach around 500 MBOPD, but would likely not significantly exceed this level.

Eagle Ford

Eagle Ford production took a little while to pick up, and actually fell in February, but has returned to growth since then. Since December the basin has added an average of 17.5 MBOPD, and most recently grew by 36.5 MBOPD. Assuming growth continues but slows slightly from the current fever pitch, the Eagle Ford may exceed 1,450 MBOPD by March 2018.

Source: EnerCom Analytics; EERC = EnerCom Effective Rig Count: 1,873 in U.S. unconventional basins

Unconventionals may void the gap made by 2017 OPEC cuts

In total, the four main U.S. unconventional oil basins could grow by 1,240 MBOPD from December 2016 to March 2018. While declining production in other fields, particularly legacy conventional plays, will offset some of this growth, American shale can seriously counterbalance OPEC production cuts.

The oil cartel may be forced to cut production further if they wish to see oil prices rise and inventories fall.

By Oil and Gas 360

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