US shale oil production has surged this year, underlining the short-cycle nature of the resource, but what goes up can come down. Shale oil production is much more responsive to price than the majority of conventional drilling and there are early indicators that recent output gains are already topping out.
Such has been the jump in production that the US Energy Information Administration (EIA) now predicts total US liquids supply this year of 17.83 million b/d, more than 1 million b/d higher than it forecast for 2018 a year ago, largely as a result of increased shale oil drilling.
The jump in US output, higher production from Saudi Arabia and Russia, Washington’s granting of sanctions waivers to key importers of Iranian crude and an increasingly gloomy economic outlook, have all served to take the heat out of the oil market.
The result has been the liquidation of long positions by hedge funds and traders, a drop in oil prices, and a softening of the market’s backwardated structure.
However, while US oil production may now be quicker to take advantage of high returns, that same short-cycle responsiveness also works in the opposite direction.
Coming in from the cold
Prior to the late-2000s, the oil majors at least saw the future as being offshore in ever deeper water and harsher environments. This would require big capital, long-lead times and expertise only they possessed.
The prospect of the marginal barrel taking around…