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Nick Cunningham

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Will Surging U.S. Shale Kill Off The Oil Rally?


The U.S. shale industry is bringing enormous volumes of new oil supply online, breaking records each month. The U.S. could top 10 million barrels per day (mb/d) by February, and reach a staggering 11 mb/d by the end of next year.

The EIA released the latest version of its Short-Term Energy Outlook (STEO), in which the agency dramatically revised up its expectations for U.S. oil output. Previously, the EIA thought the U.S. would only surpass the 10 mb/d threshold at some point in mid-2018; now they see it happening in February.

The larger production increase occurring on an accelerated timeline means that U.S. production will average 10.3 mb/d in 2018, the EIA says, up from its prior forecast of just 10.0 mb/d. In other words, U.S. output in 2018 will be 970,000 bpd higher than last year, a larger increase than the previous estimate of a 780,000-bpd increase.

The gains keep coming—the agency expects the U.S. to average 10.8 mb/d in 2019, while surpassing 11 mb/d by November 2019. Obviously, as has been the case for some time, most of the growth will come from the Permian basin.

On the demand side, the EIA sees consumption growing strongly this year and next, with global demand rising by an average of 1.7 mb/d in both 2018 and 2019.

These are staggering figures, and if realized, it would mean the U.S. will be producing more than Saudi Arabia and Russia by the end of next year. “If the pricing environment is supportive, there is no reason” why the U.S. couldn’t match the EIA’s projections, said Ashley Petersen, lead oil analyst at Stratas Advisors in New York, according to Bloomberg. “Saudi Arabia and Russia aren’t really making new investments on the scale we would expect to be competitive at those volumes in 2019.” Related: Federal Regulators Deal Huge Blow To The Coal Industry

The U.S. shale industry, despite promises from executives about approaching their drilling plans with caution, is clearly putting its collective foot on the accelerator. “Yesterday, the U.S. EIA revised U.S. crude oil production for 2018 up by 250 k bl/day to 10.27 m bl/day. That was the fourth revision higher in four months,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “We still think it is too low with yet more revisions higher to come and we think that everyone is probably able to see this with just a half eye open.”

Schieldrop cites the dramatic increase in the backlog of drilled but uncompleted wells (DUCs) from last year. The DUC list expanded by 30 percent in 2017, rising from 5,674 wells in January to a whopping 7,354. Some of that increase had to do with supply constraints in the market for completion services. If the shale industry starts to whittle away at that DUC list in 2018, it could provide a jolt to oil supply. “Last year’s shale oil activity was mostly about drilling, with fracking and completion substantially trailing the drilling activity,” Schieldrop said. “For the year to come, we’ll likely see a shift towards completions of these wells and less focus on the drilling of new oil wells.”

But to a large extent, the massive level of growth from U.S. shale that everyone is counting on is predicated on continued strength in prices. The forecast could be derailed if there is another price slump for an extended period of time. A rapid increase in supply in and of itself could cause prices to fall, killing off the price rally that started the drilling frenzy to begin with.

“It’s not completely unexpected given the price momentum,” Eugen Weinberg, head of commodities research at Commerzbank AG, told Bloomberg, referring to the recent run up in prices. However, “the shale rebound is also for real,” he says, risking a “massive price slump.”

But oil traders don’t want to hear that right now. Brent is just shy of $70 per barrel, a level not hit in about three years. The bulls are running rampant. However, that level of one-sided sentiment often precedes a sharp change in direction.

Commerzbank noted the irony of oil prices hitting fresh highs on the same day that the EIA published a report forecasting U.S. oil supply rising to 11 mb/d. Related: Blockchain Tech Is Transforming The Energy Industry

“Reading the latest U.S. Energy Information Administration (EIA) prediction of U.S. crude oil production makes it seem virtually impossible for the price to react in this way,” Commerzbank analysts wrote. “Selective perception is the reason why the market is completely ignoring this just now. Attention is paid only to news that tallies with the picture of rising prices.”

The report from the investment bank pointed out that oil prices surged because of the large expected decline in crude inventories, a piece of data that may seem bullish but was undercut by the fact that gasoline inventories also spiked. “Oil prices are become increasingly detached from the fundamental data and risk overshooting,” Commerzbank concluded.

By Nick Cunningham of Oilprice.com

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  • the masked avenger on January 11 2018 said:
    Price goes up demand goes down, as will the world economy. Keep raising prices, watch demand plunge. No matter how rosey the forecast, high oil speaks decline. Greed and smoke and mirrors don't rewrite basic economics. Will oil price print this??? Doubtful, if the comments don't match the hype. They get deleted.
  • Mamdouh G Salameh on January 11 2018 said:
    No it will not. The fact that the oil price has risen by 27% to $69.70 a barrel since early December 2017 gives the lie to claims by the US Energy Information Administration (EIA) about projected increases in US shale oil production in 2018 and 2019.

    The recent rise in oil prices means two things: one is that the global oil market does not believe claims by the EIA of increases in shale oil production. The second is that bullish forces are gaining the upper hand underpinned by very positive market forces.

    The projections by the EIA about shale oil production reaching some 10.30 million barrels a day (mbd) in 2018 and 11 mbd by 2019 are no more than projections. Moreover, past experience has shown a discrepancy between the EIA’s Short-term Energy Outlook (STEO) and its monthly outlook estimated at 600,000- 700,000 barrels a day (b/d).

    Contrary to claims otherwise, US shale oil production in 2017 was estimated at 9 mbd or thereabouts and not 10 mbd as claimed by the EIA. Moreover, the fact that drilled but uncompleted wells (DUCs) have expanded by 30% has more to do with the steep production decline associated with shale oil wells necessitating drilling thousands of wells annually just to maintain production.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Paul on January 11 2018 said:
    The message is clear. The demand for American crude oil is robust and the global economic growth is accelerating. Amply supplied domestic markets have allowed gasoline prices to remain low through a period of significant uncertainty.

    DUCs offer American producers outsized cash flows which in turn can be used to pay down debt or can be used as an insurance policy in the event of a collapse in price of crude oil.

    No other producer in the world retains this level of flexibility and until this inventory is normalized, most likely sometime the next economic recession, we are the low cost producer in the world.
  • George Shawnessey on January 11 2018 said:
    More earthquakes, more poisoned ground water, more asthma, more children born needing brain surgery, more Alzheimers, and especially more methane driving climate change out of control. But, hey, the fracksters make more money.

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