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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Rise Of U.S. Shale Could Jeopardize OPEC Deal Extension


OPEC and the U.S. continue to fight for dominance in the global oil market. The battle has been recently been defined by OPEC’s production cuts, but new U.S. shale production has been countering strongly as of late.

Despite the current supply glut (especially in the United States), the price of oil has been kept in the lofty $50s for a while now, ever since OPEC and Russia agreed to restrict 1.8 million barrels of crude oil from the world market. The higher prices have led to higher profits, however, even in the U.S. These prices have incentivized increased U.S. production, allowing companies to be drilling at their highest rates in over a year, posed to reach record levels by year-end.

The week of March 6th, 2017, marks the beginning of the annual CERA week energy conference, in which the chief players in the oil market (the Saudis, other Gulf producers, Russians, Brazilians, Mexicans, and the United States) will get together in Houston.

OPEC will meet again in May to determine whether the production cutback deal will stay in place or not. Russia, the world’s largest energy producer, has gained from these cutbacks, but is still recovering from crashing prices in general. The OPEC secretary general has come out recently to say that it is too early to tell whether the production deal will remain in place. Related: U.S. Shale Kills Off The Oil Price Rally

The U.S. shale industry has become a dominant force in the global oil market, being home to the world’s largest integrated oil producers, as well as many independent drillers. President Donald Trump has certainly helped to revitalize the industry, with a pro-hydrocarbon agenda and plans to stabilize U.S. markets. The White House has encouraged more drilling and energy infrastructure, as evidenced by the passing of the Keystone XL and Dakota Access pipelines.

The U.S. oil economy is further supported by the excessive oil found in the Permian Basin, running beneath Texas and New Mexico. Permian shale has been one of the biggest players filling the gap left by the OPEC cutbacks. Moreover, technological advances have made profit possible at even lower prices, which again helps the U.S. revitalization.

The real issue is what both Saudi Arabia and Russia contribute to the discussions concerning the cutbacks, and whether they are ready to continue doing so given the increased production in the United States. The U.S. growing the market while OPEC is attempting to retreat spells trouble for the Middle Eastern conglomerate. Related: Iran And Iraq To Ramp Up Oil Production Despite OPEC Cuts

Saudi Arabia has made the largest cuts of the OPEC countries, and as the largest exporter in the world, the country tends to drive OPEC policy. Analysts are unsure how much pressure will be placed on the Saudis if the United States’ production continues to increase. Both production and exports in the U.S. have hit record highs recently, at 9 million barrels a day and 1 million barrels a day respectively.

This has led some analysts to believe a collision between the U.S. and OPEC is looming around the corner if United States production brings to market enough oil to push prices below $50.

Exxon Mobil chairman/CEO Darren Woods said that part of the reason the unconventional drilling in the U.S. is working so efficiently is because the industry is driven by free markets and economics, whereas the OPEC drillers rely on low costs. The cutbacks by OPEC, of course, are a result of a failed attempt to let the market set prices, leading to a collapse of prices to $20 a barrel.

If the cutbacks do continue, however, it remains to be seen if the U.S. can satisfy the demand created by the gap, and if so, for how long.

By Michael McDonald for Oilprice.com

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