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.
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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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This makes you wonder why the Canadians aren't going after all the shale oil in Alberta & British Columbia?
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?
2002: 245 BCF/day
2002: 67 million bpd
Global Gas to C+C Ratios (GOR):
2002: 3,660 CF/BO
Oil demand: Beware the gap
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
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.
"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
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.
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!