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Has OPEC Seriously Underestimated U.S. Shale Dynamics?


Oil ended the week where it started, as rising U.S. shale production and a bearish inventory report continued to put pressure on WTI and Brent.

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Friday, January 20, 2017

Oil was flat this week as rising U.S. shale production and a bearish inventory report continued to put pressure on WTI and Brent. Crude oil inventories rose by another 2.4 million barrels, gasoline stocks jumped by nearly 6 million barrels, and upstream production figures provided further evidence that U.S. shale output is coming back is already here in the form of a huge rig count increase.

Oil price to fall below $50 if OPEC fails to deliver. A new CNBC survey of energy forecasters finds that experts believe that oil prices will fall from today’s levels if the OPEC cuts do not materialize. Many analysts have pegged the expected compliance rate of OPEC members at about 80 percent, which translates to roughly 1 million barrels of oil per day taken off the market. Others argue that the oil market has become unduly optimistic. "The recent rally in oil prices above $50 rests more on faith than fact: no hard data on compliance around pledged supply cuts by OPEC and non-OPEC countries will emerge until February" Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, told CNBC. He forecasts Brent to average just $47 per barrel in the first quarter. And he isn’t the only one. "I'm convinced that prices will fall through the year as the market recognizes that OPEC is not complying, Russia does not comply at all, U.S. shale recovers massively thanks to some steps of the Trump administration," Eugen Weinberg, head of commodities research at Commerzbank, said.

IEA: shale coming back, will lead to oil price downturn. The IEA upgraded its estimate for rising U.S. shale production this year, projecting output will increase by 500,000 bpd by the end of 2017, which will translate to an increase of 170,000 bpd averaged over the year. In addition, Brazil and Canada will chip in another 415,000 bpd, mainly from large projects planned years ago. The Paris-based energy agency says that OPEC cuts could lead to significant inventory drawdowns of about 0.7 mb/d, tightening the market in the first half of the year and leading to increases in crude prices. But beyond that, rising non-OPEC production could cause oil prices to fall back again towards the second half of the year. At a minimum, greater price volatility is set to return, the IEA says.


U.S. spending to rise. An array of oil companies large and small are stepping up spending this year now that oil prices have seemingly stabilized. According to Barclays, U.S. E&Ps could increase capex by more than 50 percent in 2017, which could surprise OPEC with a strong rebound in production. “They’re about to find out how efficient the U.S. producers have become,” Barclays analyst J. David Anderson told the WSJ. Related: Solar Could Be A Cheaper Power Source Than Coal Within A Decade

Trump takes over with cabinet in flux. Donald Trump takes over the presidency today, at a time when much of his cabinet has not been approved by the Senate. Moreover, news reports have surfaced that hundreds of top positions at many agencies remain unfilled, including the Departments of Defense, State and Energy. However, his nominees fared relatively well during tough questioning this week, and as of now, it appears that few if any will have trouble winning confirmation in the Republican-controlled Senate. Harold Hamm, CEO of Continental Resources (NYSE: CLR), who has at times had the ear of the new President, says that a wave of deregulation will be coming to the energy sector in short order under the new administration, which could unleash more oil and gas production.

Aramco: $25 trillion needed for oil supply to keep up with demand. The CEO of Saudi Aramco, Amin Nasser, said that the world will have to invest $25 trillion in upstream production over the next 25 years in order to satisfy rising demand. Any shortfall in investment will lead to a tightening of the market and will cause price spikes. He dismissed any notion that renewables will assume a dominant role in the global energy sector. Aramco wants to double its natural gas production over the next decade in order to free up more oil for export.

China’s oil demand at risk from import quotas. China’s central government could cut import quotas for some of the country’s independent refiners, known as teapots. The move would hit teapots that did not use all of their quota last year. But demand growth in China centers around these refiners and the policy move could put a dent in China’s overall oil imports. “All these uncertainties around the teapot quota will weaken the nation’s oil demand in the first half of the year,” Guo Chaohui, an analyst at Beijing-based China International Capital Corp., told Bloomberg. “China’s oil imports hinge on one single big factor, and that is the teapots. And right now, they are facing policy risks.” Related: Can Saudi Arabia Survive With Oil Below $60?

Total set to drill for gas in Cyprus. The race for gas in the Eastern Mediterranean is heating up as Total (NYSE: TOT) is jumping into the fold, looking to drill off the coast of Cyprus not far from Eni’s (NYSE: E) 2015 discovery of the Zohr field, which was the largest gas discovery ever recorded in the Mediterranean. Now, many of the oil majors have a growing presence in the region. ExxonMobil (NYSE: XOM) and Eni are working with Total on Cyprus exploration; BP (NYSE: BP) and Eni are exploring in Egyptian waters; while the smaller Noble Energy (NYSE: NBL) has a strong presence along Israel’s coast. A few weeks ago Lebanon overcame political gridlock in order to lay out plans to hold an auction off of its coast, hoping to get its piece of the gas rush. As the discoveries come online in the next few years it could transform gas supplies and gas trade in the Middle East.

Natural gas prices rise again. EIA data shows another sharp drawdown in natural gas inventories, leading to a rebound in prices after a few weeks of warm weather led to softer pricing conditions. Gas storage levels dropped by 243 billion cubic feet last week, steeper than analysts had predicted. Stockpiles are now below the five-year average for the first time since 2015, and as a result, spot prices have more than doubled from the lows seen in early 2016.

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  • Bill Simpson on January 21 2017 said:
    They didn't underestimate shale. They underestimated how the invention of horizontal drilling combined with advances in fracking has unlocked a lot of conventional oil trapped in thin layers of deeply buried oil bearing rock. Add that to the oil in shale, and it adds up to a lot of oil which is suddenly profitable to extract. That new drilling, fracking, and propping, technology changed the world more than all but a few people realize. It may have pushed back the peak oil banking crisis about 15 years. (Less oil available = less goods transported & less energy to accomplish actual work = shrinking economy = bankruptcy crisis from failing businesses = banks go belly up from massive loan losses. Oil is finite, so once it peaks, it goes down forever, taking economic output with it. Banks can't survive for long in a shrinking economy. They aren't designed for it. They need growth. But that will be impossible because liquid fuels made from oil move nearly everything. Once oil production begins to permanently decline, growth must stop. We won't be 'safe' until oil gets really scarce. The financial crisis will hit soon after 'peak oil' production does. We can credit George P. Mitchell for pushing that day back a decade or two.)
    Elon Musk helped with his electric car too. Notice how many of the big boys are suddenly interested in electric vehicles since Teslas started passing them up. Musk has said that his reason for starting Tesla was to force electric car technology into the mainstream. He succeeded. Geniuses often do.

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