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Tsvetana Paraskova

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Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Can U.S. Shale Stop A Global Oil Supply Crisis?

Despite an expected slowdown in Permian growth rates, the U.S. shale patch is increasing production and will continue to do so this year and next.

Oil market investors and analysts are currently very much focused on the demand side, with concerns over the potential of trade wars to curb oil demand growth. On the supply side, analysts have shifted their focus onto losses from Iran, crumbling Venezuelan production, and whether OPEC and its allies will be able—and willing—to offset supply disruptions.

Currently, U.S. shale growth is probably the most overlooked supply-side factor, a factor that will likely offset many of the losses from production problems elsewhere in the short term. The big question is for how long U.S. tight oil growth can offset declining production in other parts of the world.

“The explosion in U.S. tight oil production has long been the dominant supply catalyst within the energy complex but now finds itself at the tail end of concerns. Even so, its ascent continues apace,” PVM Oil Associates oil analyst Stephen Brennock wrote in a research note on Wednesday.

“U.S. shale doom-mongers should not get ahead of themselves,” Brennock adds, noting that U.S. shale still has room to grow and currently, the “only way is up.”

“The key medium-term question for the supply side of the oil market is: How much longer can rapid U.S. oil supply growth continue to offset poor production outcomes in the rest of the world?” Longview Economics’ director and senior economist Harry Colvin said in another research note. Related: Shale Profits Remain Elusive

If it weren’t for U.S. oil production, the world would be some 5.3 million bpd short of oil supply over the next five years, according to Colvin. But U.S. output “could, and will, fill in most of that gap,” he said, adding that unlike other major oil producers, the industry in America is not determined by politics and has fewer ageing conventional fields from which to expect production declines.

In the shale patch, however, production declines much faster than in conventional oil fields where output can be sustained for decades. There is also concern that the sweetest spots in U.S. shale plays could soon be drilled out and drillers will have to move to harder-to-frack and higher-cost areas. There’s already inflation in oilfield services, wages, and frac sand costs. Then there is the much-talked-about pipeline takeaway constraint in the most prolific shale basin, the Permian, which is expected to slow down the pace of production growth, at least until the latter half of 2019, when most of the pipelines currently in the works are planned to come into service.

This year, U.S. tight oil production is forecast to grow by a record 1.3 million bpd to over 5.7 million bpd, due to increased investment in 2017 and 2018, the International Energy Agency (IEA) said in an analysis last month.

OPEC’s Monthly Oil Market Report from earlier this week expects U.S. tight oil production to grow by 1.22 million bpd on a yearly basis, to average 5.91 million bpd in 2018, unchanged from last month’s assessment. Unconventional natural gas liquids (NGLs) and tight crude combined account for more than 98 percent of the expected total supply growth.

“For 2019, y-o-y growth in U.S. tight crude will occur at a slower pace due to several fundamental constraints, mainly limited pipeline capacity to transfer Permian oil to the Gulf coast,” OPEC said. Tight oil production from the Permian is likely to grow by 640,000 bpd to average 3.40 million bpd in 2019, or about 200,000 bpd less than the expected growth for this year, the cartel added.

Short-cycle U.S. shale production is growing and will grow next year too, albeit at a slower pace. Yet, it may not be enough to plug the gap in just a couple of years, when the slump in investments in conventional fields around the world—the result of the oil price crash—will start to show up in the global oil supply.

By Tsvetana Paraskova for Oilprice.com

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  • Sean Yun on August 16 2018 said:
    We have to face with what is really going on in the oil market!

    The oil price, based on benchmark WTI , will be stably moving in the range of 70-80$ until the end of Trump Government, maybe six more years?

    The reasons are like below:

    1. If the oil price go over 80$ range, it is a sort of signal that world economy starts recession. Because as you may know that the Fed has been hiking its rate since 2015, and next month we will have one more rate-hiking in Sep, also there will be another raising rate in Dec. Also, in 2019, there will be 3-4 more times of rate-hiking by the Fed, and 2-3 times more in 2020yr. That means the market liquidity will be dwindled further and further, so no impetus to push up the oil price.

    2. Currently, the US$ has been stronger and stronger, as I had left a comment here, due to stronger US$ will block the oil price direction toward North, but South. That time, the US$ index was hovering around 93level, however today at this moment, it is moving in the range of 96.46. That means US$ has been more and more expensive since last 2nd economic quarter. As you can see that the WTI has been moving down and down.

    3, Now, so called EM ( Emerging Market) has been suffering from financial instability due to the above 1, 2 reasons. Thus, EM's economies are getting slower and slower than ever since 2013yr. For example, Chinese have not yet imported any barrels from the USA in Aug. As you know that Chinese currency Yuan has been depreciated against US$ more than 6% since June.

    Based on the economic conditions above, the oil price cannot go up to the level of even 80$, however, US Government does not like strong US$ compared to EM currencies esp against Asian currencies as President Trump talked about it in May. Soon or later, the US$ direction will be turned to devaluation against esp Asian currencies in connection with 10yr US treasury's moving toward over 3.0%, currently at 2.86%.
  • Mamdouh G Salameh on August 17 2018 said:
    The answer simply and purely is that US shale could not stop an oil supply crisis. You seem to credit US shale oil with great influence on global oil supply. If that is the case, then why did the US import more than 10 million barrels a day (mbd) in 2017.

    While it is true that the US exported some shale/tight oil but it imported equivalent amounts of medium and heavy crudes for its refineries which are tooled to refine such crudes.

    What follows from this is that if it is assumed that US shale oil can stop a global supply crisis, how come it can’t eliminate US foreign oil imports.

    The global oil market is heading towards an oil supply gap by 2022. Some 15 mbd of new oil will be needed by then to meet global demand and to offset an annual global depletion rate estimated at 5% or 4.8 mbd, equivalent to Iraq’s oil production. How much could US shale contribute to the supply gap? Probably very little.

    The US Energy Information Administration (EIA) expects well production per rig in the Permian to fall by 10,000 barrels a day (b/d). With 480 rigs currently operating in the Permian, it means that overall daily production in the Permian is projected to fall by 2.4 mbd. This contradicts claims by the EIA and the International Energy Agency (IEA) that US shale oil production will reach 11 mbd by the end of this year and that the US will overtake Russia and Saudi Arabia by the end of the year or early 2019 to become the world’s largest oil producer.

    The productivity problems in the Permian are symptoms of bigger problems in the whole US shale oil industry. It is an industry which will probably never become profitable and is currently facing diminishing returns. It is also a reflection of the fact that shale drillers have exhausted the rich spots and are now being forced to move into less productive locations.

    In addition to the above, the US shale oil industry suffers from high depletion rate ranging from 70%-90% in the first year of production. This necessitates the continuous drilling of new wells to prevent production falling. It is estimated that the US shale oil industry needs to drill up to 10,000 wells annually at a cost of some $50 bn.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • dryhole dutton on August 17 2018 said:
    40-70% of eagle ford's production is condensate (45
  • Jeffrey J. Brown on August 17 2018 said:
    A couple of key points to keep in mind.

    First, the US probably has to put on line about 2 million bpd of new Crude + Condensate (C+C) production every year, just to maintain current production. In round numbers, US operators have to more or less replace the productive equivalent of all of Mexico's current oil production every year, just to maintain current US production.

    Second, US C+C production (what the EIA calls "Crude oil" production), is heavily weighted toward the light end. About 42% of current US Lower 48 C+C production exceeds the maximum API gravity for WTI crude oil, 42 degrees. Globally, actual crude oil production (45 API gravity and lower) has probably been on an "Undulating Plateau" since 2005, ranging, I estimate, from about 68 to 70 million bpd, versus about 69 million bpd in 2005.
  • Loran Tritter on August 20 2018 said:
    There is a short-run supply curve for US tight C+C production that has been traced out (very roughly) over the past few years. Resource depletion is an issue, but only locally. Given a longer time horizon, tight oil and gas sands exist abundantly elsewhere.

    Fracking is a new mining technique that is opening up a new resource base worldwide.

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