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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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U.S. Shale To Surge After OPEC Extension

Midland

Just as expected: OPEC and the group of non-OPEC countries led by Russia extended their production cuts for an additional nine months through the end of 2018.

“It’s been a good long day… in fact, it’s been a great day,” Saudi oil minister Khalid Al-Falih said at the presser. “I’m pleased to announce the decision has been unanimous.” The deal to cut 1.2 mb/d from OPEC, plus nearly 0.6 mb/d from non-OPEC countries, will run from January to December 2018.

Assuaging some concerns from the Russian delegation, the deal also included a review of the production limits at the next official OPEC meeting in June. That opens up the possibility of removing or adjusting the agreement in six months’ time, although because OPEC meets every six months anyway to roll over the deal, this is a somewhat redundant statement. Al-Falih said the group will be “agile” and “on its toes,” ready to respond if market conditions change significantly.

There were some fears that Russia could spoil the party as the meeting date drew near, but at the press conference, Al-Falih said there was “no light between Russia and Saudi Arabia,” and that they are completely united. Al-Falih said he would be “breathing down the necks of the other 24” participants to make sure they remain in compliance with the agreement.

Related: U.S. East Coast Looks To Become Hub For Wind Power

There were a few other morsels of interest in the announcement. Libya and Nigeria agreed not to boost their production in 2018 above their 2017 levels, a soft cap on their output after being fully exempted from the cuts for the past year. Both countries have seen their output levels ebb and flow, but the agreement to restrain production is something new. It won’t really change the supply/demand balance as it currently is, though it could prevent new supply from hitting the market in 2018 from those two countries. Al-Falih said this will prevent any “surprises” to the oil market in 2018, avoiding the scenario that played out this year with the sudden restoration of output from the two countries.

That, in theory, would count as a bullish surprise for the oil market, but judging by the tepid movement in spot prices, oil traders snoozed through the meeting, since they had basically priced this outcome into the market, so little changed.

Meanwhile, before OPEC went before the cameras for its official press announcement, word came from the EIA that U.S. oil production surged in September, jumping by a massive 290,000 bpd from a month earlier, hitting 9.48 mb/d. That figure seems to put to rest a lot of questions about the EIA overestimating U.S. oil production in its weekly surveys, which have consistently come in much higher than the more accurate monthly figures. The production numbers for September go a long way toward backing up the notion that the U.S. shale industry shifted into expansion after prices jumped above $50 per barrel.

The data release on the same day that OPEC agreed to an extension was probably met with some unease by the cartel. Several members have been wary of incentivizing a strong drilling response from the Texas shale fields, so the fact that we now know that production ramped up dramatically in September as prices rose should dampen OPEC’s enthusiasm.

If the OPEC/non-OPEC coalition keeps 1.8 mb/d of supply off of the market for another year, there’s no doubt they will bring the market back into balance and potentially even overshoot and push things too far. WTI could bounce above $60, which could spark an even stronger drilling response from U.S. shale, potentially undermining OPEC’s objective. Related: Who Will Win The Self-Driving Taxi Race?

For a taste of what’s in store, Rystad Energy, for example, predicts that the U.S. will hit 9.9 mb/d by the end of 2017, which will give U.S. shale a lot of momentum heading into next year.

When asked about the rapid comeback of U.S. shale, Al-Falih cited the dramatic decline from conventional and mature oil fields, a depletion rate that means each year the market needs several million barrels per day of fresh supply. He said he doesn’t think “shale can carry the load,” meaning that even a robust response from U.S. shale will be soaked up by the market due to growing demand and depletion from mature fields.

Presumably, however, OPEC and Russia concluded that they had to continue with the cuts to avoid a selloff in prices. They cited the enormous progress in cutting inventories, but said there is more work to do. They expect that to happen by mid-2018 or so. But will U.S. shale spoil these plans?

By Nick Cunningham, Oilprice.com

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  • Mookie on November 30 2017 said:
    Shale to the rescue... Shale single handily beats OPEC, RUSSIA AND SAUDI. Yeah!!! Go shale go, you can do it!!
  • mike tate on November 30 2017 said:
    Nick, Do you use any other sources of information for your articles other than the EIA? UP 290,000 bopd ? Really? I struggle trying to understand how production can be going up when well completions are going down with shale oil. Also how can other conventional US production not have declined since the price collapsed? That's 4 million bopd that can't be making money. Why are shale producers so eager to drill and complete wells just to break even? Have you ever looked at the completion reports on some of the wells in the Permian? I'm trying to understand how journalists can come to conclusions that really defy common sense. OPEC has got to be thinking our industry is the biggest bunch of idiots for finding out a way to develop this resource, which is quite an accomplishment, then to manage to get $50 a barrel for it.
  • David on November 30 2017 said:
    As the price of oil starts to stabilize and the US build decreases, now we will see the over estimated reserves by the EIA start to show.
  • Rico Suarez on November 30 2017 said:
    Here is a headline for you. "Pennsylvania fracking rocks Delaware" .
  • Bill Simpson on December 01 2017 said:
    Is West Texas going to boom, or what! Too bad it's so ugly out there.
    This makes you wonder why the Canadians aren't going after all the shale oil in Alberta & British Columbia?
  • JustMeNS on December 01 2017 said:
    Shale will jump for a bit then drop as fast. As another news item stated the sweet spots are being exhausted. The Permian is the last place where the sweet spots are being rapidly drilled as the other plays are already done. As we have seen, the permian is becoming gassy which suggests its sweet spots are also drying up. I agree with OPEC that shale cannot keep up with demand. I don't think that shale can keep up its own production let alone demand. There will be lots of disappointed shale company bond/share holders in the near future.
  • Jeffrey J. Brown on December 01 2017 said:
    Two Petroleum Economist articles are linked below on topics that I have repeatedly discussed: (1) The increase in the gross underlying rate of decline from existing production and (2) The composition of US (and global) Crude + Condensate (C+C) production, i.e., the data suggest that condensate represents an increasing percentage of both US and global C+C production. (Note that the most common dividing line between crude and condensate is 45 API gravity.)

    I suspect that we are rapidly headed toward a physical shortage in the supply of actual global crude oil production--given flatlining post-2005 actual global crude oil production combined with the cutback in upstream Capex and rising decline rates. While a lot of shale players would want us to believe that 35 API gravity crude = 45 API gravity = 55 API gravity, refiners live in the real world.

    Consider this item from the "Too light, too sweet" article:

    "Notably, Cushing storage volumes have risen while refinery storage volumes have fallen, which points to slack market interest in light sweet shale oils."

    Perhaps the simplest way to illustrate the increase in the percentage of condensate in global C+C production is to review the following global gas data (BP) and global C+C data (EIA).

    We saw a 7 million bpd increase in global C+C production from both 2002 to 2005 and from 2005 to 2016, but of course the 2002 to 2005 rate of increase was 3.3%/year, versus only 0.8%/year from 2005 to 2016, about one-fourth of the 2002 to 2005 rate of increase. However, given that condensate is a byproduct of natural gas production, I suspect that virtually all of the post-2005 increase in global C+C production consists of condensate and not actual crude oil, as evidenced by the 2005 to 2016 increase in the ratio of global gas production to global C+C production, versus virtually no change in the ratio from 2002 to 2005.

    Consider the incremental increases in global gas production per million bpd increase in global C+C production.

    Note that we saw a 3.6 BCF/day increase in global gas production per 1.0 million bpd increase in C+C production, i.e., 3600 CF/BO GOR for the incremental increase in production, from 2002 to 2005

    However, we saw a 10.4 BCF/day increase in global gas production per 1.0 million bpd increase in C+C production, i.e., 10,400 CF/BO GOR for the incremental increase in production, from 2005 to 2016—which is almost a three fold increase in incremental gas production per barrel of incremental oil production.

    In other words, I suspect that while global gas production and associated liquids, condensate and natural gas liquids, continued to increase after 2005, actual global crude oil production has been on an "Undulating plateau" since 2005.

    In effect, the trillions of dollars spent on global upstream capex since 2005 only served to keep actual global crude oil production approximately flat. What happens to actual global crude oil production given the decline in global upstream capex combined with rising decline rates?


    Global Gas:

    2002: 245 BCF/day
    2005: 270
    2016: 343

    Global C+C:

    2002: 67 million bpd
    2005: 74
    2016: 81

    Global Gas to C+C Ratios (GOR):

    2002: 3,660 CF/BO
    2005: 3,650
    2016: 4,200

    Oil demand: Beware the gap

    http://www.petroleum-economist.com/articles/markets/outlook/2017/oil-demand-beware-the-gap

    Excerpt:

    It seems that the decline rate has changed during the course of the oil market's downturn since mid-2014. Decline rates shrank in the initial phases of the price slump, as com­panies sought to keep existing production as high as possible by streamlining maintenance and focusing capital. Offsetting a field's or well's decline is, after all, often the cheapest barrel a company can bring to market. It was a way producers battened down the hatches to try to last out what was at first thought likely to be short-lived price weakness.

    As the notion that prices would stay "lower for longer" took hold, these temporary efforts were undercut by the sharp drop in capex. The result was an increase in the decline rate. Rystad estimated that 2016 had the highest decline rate of the past 25 years. It's likely to get worse, too, as the recent deep spending cuts steepen the decline curve for the next two years. Furthermore, we can expect a long-term structural increase in the decline rate, simply because—in the absence of many new fields be­ing developed—the average age of the produc­ing ones is now trending upwards. In 2017, we assessed the decline rate at 9+%, equating to about 8.8m b/d. That's five times greater than the demand increment for 2017.

    US tight oil: Too light, too sweet
    International buyers’ appetite may start to wane in 2018
    http://www.petroleum-economist.com/articles/markets/outlook/2017/us-tight-oil-too-light-too-sweet
  • Paul on December 01 2017 said:
    US shale going to get greedy and curb production to the extent financially feasible in an attempt to maximize profits over the long term.

    There is only one market for oil in today's market and it is the producers vs. the consumers.

    OPEC and US oil producers both want to see higher oil prices and for as long as the global economy is pushing 3% or better GDP, I expect higher oil prices to allow the FED to raise interest rates.

    The FED will raise rates to a level where the economic expansion is extinguished and as the world economy stumbles oil prices will fall only then.
  • Disgruntled on December 01 2017 said:
    We shall see how disciplined the American horizontal drillers can be. It makes no sense to run 200 more rigs into the field and drill themselves back to $40 oil. These folks are supposed to be the "smartest people in the room", right? After all, they are responsible for intelligently managing billions and billions of dollars. Just the fact they have those jobs substantiates their intelligence. Would you rather sell 9.5 million barrels for $100 each, or 10 million barrels for $40 each? I pulled those values out of my arse but the point is valid. And you won't be gutting your reserves and basically giving them away.
  • Jeffrey J. Brown on December 01 2017 said:
    In regard to meeting demand there are two issues, the composition of the shale oil (heavily weighted toward very light crude and condensate) and, as the "Beware the Gap" article noted, the decline rates:

    "Significantly, the decline rate is highest in the producing segment that many in the mar­ket are relying on to swing higher to meet new demand: shale oil. A tight oil well can decline by up to 50% in its first year, after which the pace of decline starts to slow as the field ages. Even then, though, output still falls back at a rate well above the global average, regardless of the time frame examined."

    One has to wonder if globally there is also a decline in refinery storage, in addition to the decline in US refinery storage. I did see this item about China:

    China crude oil imports to rebound in January on quotas, low stocks
    https://www.reuters.com/article/us-china-oil/china-crude-oil-imports-to-rebound-in-january-on-quotas-low-stocks-idUSKBN1DU372
  • Citizen Oil on December 01 2017 said:
    @Disgruntled the USA fracking industry has destroyed the local NG market since 2008 and now the oil market since 2014. Don't ever discount their greed or stupidity. A lot of them have huge debt and have to pump to merely survive. A lot of their executive bonuses are based on growth and not sustainable profitability. This will hopefully change as investors drive the message that overproducing will harm their share price and ability to secure new funds.
  • Disgruntled on December 01 2017 said:
    @CitizenOil: And they have no hope of reducing that debt without much higher oil prices. And if they get the higher prices they MUST pay down debt. It sucks to be in debt.
  • Heinrich Leopold on December 02 2017 said:
    Is it a coincidence that exactly in September 2017, authorities began to release oil from the SPR. This is a good explanation for the huge production increase. As the release of 2.5 mill barrels matches exactly the magic 290,000bbl per day production increase.
  • Jeffrey J. Brown on December 02 2017 said:
    Linked below is a graph showing the divergence between the rates of increase in global gas production and global Crude + Condensate (C+C) production after 2005. The respective rates of increase were almost identical from 2002 to 2005. If global C+C production had matched the 2005 to 2016 rate of increase in global gas production, C+C production would have been up to about 95 million bpd in 2016, versus the actual value of 81 million bpd.

    As noted above, in my estimation actual global crude oil production has been approximately flat to down since 2005, while global condensate production has continued to increase, in tandem with global gas production. In effect, I suspect that surplus condensate, in terms of both production and storage, may be obscuring a developing shortage in actual crude oil.

    http://i1095.photobucket.com/albums/i475/westexas/Global%20quotCRUDE%20Gapquot%202002%20to%202016_zps9oyfiqpp.jpg
  • John Brown on December 06 2017 said:
    This is all such a game, and OPEC/Russia are playing to lose and let the USA win. Despite a year of production cuts their remains a glut of oil sloshing around the world. From a supply and demand point of view there is NO REASON oil shouldn't be at $30 a barrel. Except of course the delusion that these oil production cuts idling millions of barrels of readily available capacity will reduce the glut, and rebalance as folks are say. All the while the USA is springing shale oil back into production in record time, with lower production cost, to take advantage of the artificially inflated price around $60 a barrel. The entire industry is likely going to collude and group think itself based on sheer greed to push prices over $60 a barrel.
    That allows the USA to increase production, take market share, reduce the dependence of others on OPEC and Russia, and make a lot of money doing all those good things for the USA. When OPEC/Russia get around to realizing their production cuts have not rebalanced oil supply and demand but incented huge new production in the USA and other NON-OPEC/Russia countries the oil will be flowing, and production cost as production increases will be dropping. The USA should give OPEC/RUSSIA a big fat oily kiss for Christmas!

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