In Fight Against U.S. Shale Oil, OPEC Risks Lower for Longer

  • Date: 15/05/17
  • Bloomberg

US shale oil has defied the naysayers. By the time OPEC meets in Vienna on May 25, U.S. output will be approaching the 9.5 million barrels a day mark — higher than in November 2014 when OPEC started a two-year price war.

When Khalid Al-Falih arrived at Davos in late January, the Saudi oil minister was exultant. The output cuts he’d painstakingly arranged with fellow OPEC states and Russia were working so well, he said, they could probably be phased out by June.

Almost five months later, U.S. production is rising faster than anyone predicted and his plan has been shredded. In a series of phone calls and WhatsApp messages late last week, Al-Falih told his fellow ministers more was needed, according to people briefed on the talks, asking not to be named because the conversations are private.

In their battle to revive the global oil market, OPEC and its allies are digging in for a long war of attrition against shale.

“OPEC is now recognizing they need longer — and potentially deeper — production cuts than they have anticipated,” said Jamie Webster, a senior director for oil at the Boston Consulting Group Inc. in New York.

From the beginning, Saudi Arabia saw a quick one-off intervention: reduce production for a few months and speed up the recovery. The strategy had an option for a six-month extension, but Riyadh initially thought it wouldn’t be needed. U.S. shale, the plan assumed, wouldn’t recover fast enough.

And yet, shale has defied the naysayers. By the time OPEC meets in Vienna on May 25, U.S. output will be approaching the 9.5 million barrels a day mark — higher than in November 2014 when OPEC started a two-year price war. The rebound has been powered by turbocharged output in the Permian basin straddling Texas and New Mexico.

Forced to adjust to lower prices, shale firms reshaped themselves into leaner operations that can thrive with oil just above $50 a barrel. Brent crude, the global benchmark, added 5 cents to $50.82 a barrel as of 9:59 a.m. in New York.

Since OPEC agreed to cut output six months ago, U.S. shale production has risen by about 600,000 barrels a day, wiping out half of the cartel’s cut of 1.2 million barrels a day and turning the rapid victory Saudi Arabia foresaw is turning into a stalemate. Al-Falih said this week Saudi Arabia is now pushing to extend the cuts “into the second half of the year and possibly beyond.”

On Thursday, OPEC’s own monthly oil market report said that production from non-members would rise 64 percent faster than previously forecast this year, driven mainly by U.S. shale fields.

So far, OPEC hasn’t been able to “cut supplies faster than shale oil can increase,”  said Olivier Jakob of consultant Petromatrix GmbH.

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