If US shale revival continues, OPEC may re-assess output cuts
By John Kemp
LONDON, March 2 (Reuters) – US crude oil production appears to be rising strongly thanks to increased shale drilling as well as rising offshore output from the Gulf of Mexico.
Production averaged almost 9 million barrels per day (b/d) in the four weeks to Feb. 24, according to the latest weekly estimates published by the Energy Information Administration.
Production has been on an upward trend since hitting a cyclical low of 8.5 million b/d in September (“Weekly Petroleum Status Report”, EIA, March 1).
Weekly production numbers are estimates based on a combination of hard data and modelling so there is some uncertainty around them (“Weekly Petroleum Status Report: Explanatory Notes and Details Methods”, EIA).
But the weekly estimates normally provide an accurate indicator for trends in the more comprehensive monthly data.
The most recent monthly statistics show output declining by 91,000 b/d in December, mostly due to exceptionally cold weather in North Dakota.
Even with this weather-driven decline, which is expected to be temporary, production was still 216,000 b/d above the cyclical low reported in September.
And the most recently weekly estimates suggest production increased significantly again during January and February.
The rise in production is consistent with the substantial increase in the number of rigs drilling for oil since May 2016.
Rising output also helps explain the big increase in US crude exports and the continued high level of domestic crude stocks.
US crude exports have averaged almost 900,000 b/d during the last four weeks, up from about 500,000 b/d in September.
US crude prices have roughly doubled over the last year which has supported a sharp expansion in domestic drilling activity.
Production cuts agreed by OPEC and non-OPEC countries in November and December 2016 have also helped sustain the drilling increase by supporting oil prices above $50 per barrel.
Most exploration and production companies report shale breakeven prices below $50 per barrel and will continue to add rigs provided prices remain between $50 and $60 per barrel.
The resurgence of US shale production poses a direct challenge to OPEC’s attempt to rebalance the global oil market while protecting its market share.
In the short term, OPEC will downplay the renewed growth in shale output and emphasise its own compliance with announced production cuts.
In the end, however, OPEC will be faced with a familiar dilemma: sacrifice market share to protect prices or defend market share and allow prices to find their own level.
Between the middle of 2014 and the middle of 2016, OPEC focused on defending its market share and allowed prices to fall to the market-clearing level.
Since the end of 2016, OPEC has switched tack and has been willing to sacrifice market share to push prices up.
Saudi Arabia has resumed its periodic role as swing producer in the oil market, shouldering the largest share of output cuts.
So long as the shale revival remains small-scale, the benefit from higher prices outweighs the costs from lower OPEC production and market share, and the strategy remains feasible.
But if US output continues to increase at the current rate, OPEC will eventually be forced to reassess its production cuts and start protecting its market share again.
(Editing by David Evans)
John Kemp is a Reuters market analyst. The views expressed are his own.