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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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U.S. Shale Is Pushing OPEC To Breaking Point

Midland Oil

The trend in the United States of accelerating oil production does not seem to be slowing down. Recent reports show that oil production from U.S. shale producers will increase in April, according to the Energy Information Administration. High market prices are currently being supported by OPEC cutbacks, and these higher profits are funding the growth of American drilling.

The release from the EIA predicts that net oil production will increase by 109,000 barrels per day in April. The seven major oil and gas basins that were included in the report will then have an output over nearly 5 million barrels per day collectively.

The monthly projections from the EIA have been climbing month after month since December. That month, 11 large oil exporting countries joined the supply cuts established by OPEC to control what they believed was an oversupplied market for crude oil.

In the United States, the main benefactors have been drillers at the Permian Basin, in Western Texas and southern New Mexico. The basin has been producing high volume since the end of 2016. The EIA expects the Permian drillers to see a gain of 70,000 barrels per day next month in their projections.

However, the Permian Basin is not the only United States site trying to capitalize on high prices. Drillers in southeast Texas, the Eagle Ford region, have also been ramping up production. Those drillers will amount for an increase 28,000 barrels per day in the EIA’s overall growth projections. Prior growth expectations for Eagle Ford producers was half on that number, at an increase of 14,000 barrels per day; the growth is not only steady, but is accelerating. Related: Why Last Week’s Oil Price Crash Was Inevitable

The EIA report for next month also shows a decline at several U.S. drilling sites. Take, for instance, the Niobrara region of Colorado and the Bakken Shale production in North Dakota. Both will experience declines of 11,000 barrels per day, and 10,000 barrels per day respectively.

The supply increases by the U.S. have capped any gains to be seen for OPEC nations from their cutbacks. This has been keeping crude futures within a tight range. On Monday, March 13th, U.S. crude ended at $48.40, a price that hasn’t been seen since before OPEC announced their cutbacks in December 2016.

These recent developments have led analysts to believe OPEC’s cutback policy is fated to end in the near future. It is clear that the United States has a sustainable means to regulate prices in the global oil market. Furthermore, the dynamics of U.S. outputs indicate that the country will not have any desire to participate in the cutbacks; U.S. law prohibits any such price controls. The United States will continue to threaten any gains to be had by OPEC. Related: Could Rosneft Take Control Of Citgo?

Saudi Arabia has been the leader in the cutbacks thus far, compensating for Russia’s hesitation with withholding supply. Historically, the kingdom has refused to participate in such cuts. However, under the tutelage of new oil minister Khalid al-Falih, they have exceeded their cuts far beyond the original OPEC deal. However, without total compliance, markets will remain unstable – regardless of how much the Saudis holdback.

These factors combined have led analysts to believe the OPEC deal will be forced to end, if only to end the profitability to U.S. growth and production.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Lee James on March 17 2017 said:
    Comparison of U.S. petroleum production with other petro-states can be a little off. Foreign production is mostly politically driven -- to balance the national budget. U.S. domestic production is mostly driven by private business profits.

    Is our domestic oil production actually cost-competitive not? If not now ... when?

    It's a good question to ask, whether we are cost competitive. Our new supplies are expensive to produce. Other countries often produce for little, but require a premium over break-even price in order to keep oil-dependent citizens happy.

    Now, our executive office wants to make domestic production part of the federal charter by offering significant tax relief. Only thing is, political leaders do not necessarily think through what the effect of increased spending will be on crude prices.

    We'd be better off if we looked down the road to see where continued fossil fuel dependency is taking us. Many blessings, but many challenges too, including national security ones.
  • Ralph Lynch on March 20 2017 said:
    Remembering that OPEC endeavored mightily to destroy the West in the 1970's, I have difficulty being objective. OPEC is a one-trick pony, and its one trick is growing old. About time.

    On another note, good comment by Lee James, thanks.

    Finally, the future must be powered by fusion, for oil is finite.

    Thanks.

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