Crude oil prices continued to surprise on Tuesday, with the U.S. benchmark adding another 4 percent to $44.60 a barrel. West Texas Intermediate is now up 65 percent since hitting 13-year lows below $27 a barrel February 11. It's a performance only bettered by the globe's second most traded bulk commodity – iron ore.
But like analysts of the steelmaking raw material, many in the industry have been surprised by the extent of the rally, consistently calling the oil price lower. The blame for the cloudy outlook for crude is mostly being laid at the door of Saudi-Arabia.
After the collapse of the Doha talks to freeze production and amid a spat with the U.S. over terrorism, the world's top producer has threatened a scorched earth policy when it comes to maintaining and growing its market share. Related: Can Oil Continue To Rally Like This?
But there is an alternative view out there that argues that the U.S., more than the Saudis, will control the direction of the market and in the event of an all-out price war holds the commanding position.
That's thanks to astonishing technological improvements in the U.S. The shale revolution that drove natural gas production between 2010 and 2015, found its way into the oil field, resulting in a 57 percent jump in U.S. crude production in just three short years to peak at 9.7 million barrels per day in April 2015.
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Source: Platts Analytics NG Market Call Long Term, NGL Market Call, and Crude Oil Market Call
And it's not just a crude story: In the last decade, the U.S. has introduced 8.3 MMBoe/d (million barrels of energy equivalent per day) into the global market when one considers production of crude, natural gas and natural gas liquids according to research by Platts Analytics.
Suzanne Minter, Manager of Oil and Gas Consulting for Platts Analytics on Tuesday testified before the U.S. Senate Energy and Natural Resources Committee about where the global oil market is heading. Related: ExxonMobil Loses AAA Credit Rating For First Time Since 1930
Minter said "the time and the rate in which this energy entered the market appears to have stressed the system in ways unimagined" making the U.S. producer "the marginal supplier and price setter into the global market":
After 14 months of persistently low prices, U.S. producers have entered 2016 with estimated capital expenditures cuts of 40 percent, more than 6,500 drilled but uncompleted wells in inventory, and find themselves operating at or near cash costs.
"Drilled but uncompleted wells hold reserves that can be brought on line in a short period of time, thereby defining the concept of spare capacity. It is plausible to believe that U.S. spare capacity may be close to rivaling OPEC’s current spare capacity. However, we believe that the prices needed to incentivize the U.S. producer to complete their drilled but uncompleted wells may be much lower than global competitors believe or would like it to be.
"The near term oil recovery will be more than likely be tenuous and ebb and flow, rather than occur in a linear fashion, as all parties involved figure out how to balance supply growth. However, due to spare capacity and the unique economic environment which drives producer activity, it may very well be that the U.S. producer is best positioned to lead the recovery and bolster economic growth.” Related: Chesapeake Has Bought Itself Time But Can It Survive?
Platts Analytics research shows that Texas alone could introduce 1.25 MMB/d of oil into the global market and can do so in a short space of time – on average just 30 days. That's more oil than the Saudis have threatened to flood the market with and all very close to the world's top refining hub.
Over and above resources and technology, the U.S. has another powerful advantage: dynamic markets. The country has roughly 9,000 different entities producing energy. Saudi Arabia's oil wealth – indeed its whole economy – is now in the hands of a 30-year old prince.
Minter said that "while each producer will behave differently than the next, it seems realistic pricing in the mid-$40 – $50 per barrel range they will bring incremental volumes back into the market place. Well, that's where we got to today.
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Source: Platts/Platts Analytics Oil Market Call April, 2016
By Frik Els via Mining.com
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Most producers will remain in defensive mode trying to repair their destroyed balance sheets by getting all they can from existing production until oil make a real recovery back in the 60's. Don't expect them to go too crazy adding production until then, most will just be happy with their declines being around 10% for the year.
One problem is going to be the costs associated with fracing these wells and putting them into production. This is the most expensive part of a land based operation. Drilling horizontal wells is cheap compared to the costs of completing them.
The second major issue is even if they did want to spend all of this money on fracing and get 100's of wells producing in 30 days, who is going to do it? There just isn't enough people in the service industry to do it, so as demand increases, so will pricing and with that pricing increase, the $50 break even become $70 and we are right back to where we are today.
There is not magic switch that is going to flood the market in the US, it just isn't going to happen.
The biggest killer for the Saudi Arabian economy is China. They are the world's leader in both solar and wind installations. They have also shifted their oil imports to Russia. The US and Saudi Arabia have been politically aligned - to be more precise, their political elites are interconnected. But the shale gas industry in the US and Saudi Arabia's dependence on oil is in fundamental conflict. Saudi has not been able to diversify beyond oil - it simply makes bad investments and cannot manage new industrial infrastructure as well as it should. So all in all, doesn't look good for the Saudi economy.
While on the subject of unknowns, I get the impression from some commentators that Chinese GDP statistics may fall into the "there's lies, dammed lies, and statistics" category. Anyway with a country the size of a continent, I guees it wouldn't be surprising if they were "guesstimates". So overall for the pupose of economic analysis, having two very important parameters so opaque must complicate the process of prediction.
Just now Saudi Arabia has started to lift oil pricing for Asian and US customers.
And it's really an unmistakable sign that soon we'll see $100 oil again.