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Rising Middle East Risk Sparks Fear of $100 Oil

Rising Middle East Risk Sparks Fear of $100 Oil

In case of further escalation,…

Is $100 Oil Within Reach?

Is $100 Oil Within Reach?

We have a situation where…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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U.S. Shale Set To Kill Oil Price Rally

Shale Industry

The resurgence of U.S. shale will undermine the OPEC-fueled price rally, capping oil prices at roughly $50 per barrel through 2017. That is the conclusion from the EIA’s latest Short-Term Energy Outlook, which forecasts WTI to average $50.66 per barrel and Brent to average just $51.66 per barrel next year.

The agency also cast doubt on OPEC’s ability to follow through on its deal. “The extent to which the announced plans will be carried out and actually reduce supply below levels that would have occurred in their absence remains uncertain.” But even if they do, any price rally above $50 per barrel will merely spark a revival in U.S. shale drilling, which will “encourage a return to supply growth in U.S. tight oil more quickly than currently expected.” In other words, the OPEC deal won’t fuel the sustained rally that oil bulls have hoped for.

In fact, the oil bust could persist for another year, according to the EIA. Rising U.S. oil production next year will postpone the projected withdrawals in oil inventories, pushing drawdowns off until 2018. In fact, the EIA actually projects inventories to climb once again, rising by 0.8 million barrels per day (mb/d) in the first half of 2017. For the entire year, inventories could build at an average rate of 0.4 mb/d. In other words, the EIA does not expect the global supply/demand equation to come into balance until the end of next year, a much more pessimistic prediction than the markets have come to expect, especially following the OPEC agreement. One prevailing theory about the state of the oil market before the OPEC deal came from the IEA, which forecast a convergence of supply and demand by the middle of 2017. The OPEC deal was supposed to accelerate that adjustment, tightening the market and moving up the “balance” to early 2017.

Related: Kuwait Calls For Meeting To Enforce OPEC Cut In Q1 2017

But the EIA is much less bullish. That is because of the expected rebound in shale production. The U.S. shale industry has succeeded in lowering the cost of drilling, as rock bottom oil prices forced efficiencies throughout the supply chain over the past two years. Even at today’s prices, a lot of shale drilling is profitable, especially in the booming Permian Basin. The agency expects overall production to be essentially flat, but supply would grow if prices increased from current levels.

The EIA found that a group of 91 publicly-traded international oil companies reported a collective profit in the third quarter of this year, the first quarterly profit since the end of 2014. The 91 companies earned a combined $2.3 billion in the third quarter, up sharply from a $54.1 billion loss in the third quarter of 2015, despite Brent prices dropping from $51 per barrel to $47 per barrel over the same time period (see chart).

(Click to enlarge)

That demonstrates the remarkable reduction in drilling costs, although it also captures the fact that the industry has written off so many assets over the past two years (which lower quarterly earnings figures) that there are fewer assets to write off these days. The damage is done and companies are starting to emerge from the wreckage.

The upside for oil prices is that demand could be stronger than previously expected next year. The EIA revised up its demand forecast for crude oil, which is set to grow by 1.4 mb/d this year and an additional 1.6 mb/d in 2017. But those numbers are debatable – the IEA has a more bearish take on demand, predicting growth of just 1.2 mb/d this year and next.

Related: OPEC Cheating Will Cap Oil At $52

Higher oil prices, should they occur, could also have a self-defeating effect on demand. As Michael K. Farr, President of Farr, Miller & Washington, writes in CNBC, the price rally will be due to restricting supply and not necessarily because demand warrants higher prices. “In a tepid economy, like our current one, supply-driven price increases act as a tax and slow discretionary consumption. As gas prices rise for consumers, there is less money left over for discretionary spending and savings.” Demand-driven price rallies are much more sustainable, but that is not what we have today. Add to that the fact that the dollar has strengthened significantly and the Federal Reserve is set to hike interest rates this month, trends that act as a drag on any price rally.

So, despite the euphoria surrounding the OPEC deal, we could be right back where we started – a slowly adjusting oil market that is still a bit oversupplied, at least for much of next year.


By Nick Cunningham of Oilprice.com

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  • david on December 08 2016 said:
    It truly is amazing that people really believe that the shale producers will repeat 2014 drilling in a drop of hat and, in turn, bring down prices. History will repeat itself, in 2008, as producers will hedge, add a few additional rigs and monitor prices for a period of time, if around $55.00 or $60.00. Understanding that some companies will add a few more than others if the location and cost environment will allow at the 55-60 price deck.

    The producers that are left have weathered $26.00 bbl and have cut costs to survive. Every company wants to grow and most will hedge their price and add a few more rigs but to think that US will add 1000 new rigs and crews the day oil hits $60.00 is just not true.
  • Randy Verret on December 09 2016 said:
    I agree with David. To think the American industry will "ramp up" overnight is not very likely. There are (now) several thousand wells drilled & awaiting completion, so those wells will (can) be factored readily into the "mix." So, this next bonanza will probably go at a slower pace.
  • DGG on December 09 2016 said:
    Yes, Nick must have been caught short on oil! Shale was funded by cheap debt and 100 oil. Yes costs have come down, mostly due to service companies giving big discounts to stay alive. Once their business is more robust the cost curve will rise again. Perhaps not to the level pre-2015 but towards that. Second, most companies are drilling and completing only in the sweet spots now, as prices demand it. So the break even is skewed. Third, the balance sheets are decimated and if free cash flow is used to find drilling, we will not see the return of 2014!

    I work in the industry as a geologist.... I know oil management.

    Lastly, shale may not be the marginal barrel - as some deepwater provinces are 80 break even. If the world needs that oil then 80 dollars it will be for the price. Can Shale replace 2-4 million barrels in less than 2 years at 50-60 dollars oil???? Only if debt driven drilling comes back - maybe the banks are real desperate.
  • Chris on December 10 2016 said:
    It takes cash to drill and banks willing to dole it out. NOT likely anytime soon.
  • Jack Evanhoe on December 11 2016 said:
    You are all wrong. Let's Get Real

    The total cuts Opec and Russia amount to Nothing.
    Shale makes money at $40.

    Russia without question - Will Cheat
    Saudis will Cheat
    Iranians Cheated before, during and after!!!

    Its smoke and mirrors to get the speculators to drive the market upwards - On the Cheap.

    The cut in supply would have to be upwards of 5million barrels and thats not going to happen.

    They are all Selfserving Addicts - After 2018 when the Saudi Royal family has to start Spending the Trillions of dollars They've hidden in HBSC only
    then will they actually, maybe cut Sales.

    If oil gets above $60 it will Crush economic activity in the U.S. by Consumers and if that happens Oil will drop to $35.

    The level of delusional thinking here is unbelievable
  • Rick on December 11 2016 said:
    Oil will stay @ current prices and start to decline slightly. Look around, how many Prius's do you see?! In addition, the XL Pipeline will go through with Trump in the White House and a Republican controlled Congress. The United States will come close to self sustainment in regards to energy. Frankly, this should have happened decades ago. The oil deals, with the death cult states, will come to an end. Ali babba & the forty thieves will gnash their teeth because of their greed which caused American ingenuity to explode! North America has far more oil than all of the Middle East! Game over.

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