Saudi Arabia has decided to turn up the heat on U.S. shale producers.
The de factor OPEC leader ramped up oil production in March despite the fact that it is pumping into one of the worst bear markets in years. A new report from the International Energy Agency found that OPEC increased oil production by an estimated 890,000 barrels per day (bbl/d) in the month of March.
But Saudi Arabia made up the difference, increasing output by an additional 390,000 bbl/d to 10.1 million bbl/d, a near record-high. The move to increase oil production in the face of a well-supplied market is likely a strategy to maintain market share and force higher cost producers – such as U.S. shale – out of the market.
And there is growing evidence that Saudi Arabia’s strategy is bearing fruit. U.S. rig counts have fallen below 1,000 for the first time since 2009. Rig count declines in the U.S. appeared to be slowing after several weeks of only a dozen or so rigs being taken off the market, but last week an additional 40 oil and gas rigs were removed, indicating that additional cut backs are in the works. Related: The Real Cost Of Cheap Oil
More importantly, the EIA now says that U.S. oil production will decline in May by 57,000 bbl/d, with cut backs coming from the Bakken, Eagle Ford, and the Niobrara Shales. Since more rigs will be removed from the shale patch in the weeks ahead, larger declines in total U.S. oil production can be expected for much of this year.
Saudi Arabia is keeping the pedal to the metal. It is actually increasing rig counts in order to keep production going full tilt. That means that oil prices could remain subdued for quite a bit longer. The painful adjustment will have to come on the shoulders of U.S. drillers. As the IEA notes in its report, “a faster-than-expected decline in North American unconventional supply” will lead to a “faster recovery” in oil prices.
Still, oil prices increased after the IEA report. Despite the flood of OPEC oil – which has surpassed its official quota – oil demand is set to pick up as consumers respond to lower prices. The IEA revised upwards its demand picture for 2015 by an additional 90,000 bbl/d, projecting an overall increase of about 1.1 million bbl/d over 2014.
By Charles Kennedy for Oilprice.com
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