OPEC versus Shale: A look at the oil markets in 2017 By Steve Graham

This is an article written By Steve Graham and produced by FTR Reports.

production again in February. Some reports place the compliance rate closer to 86%. Efforts to lower inventories and raise prices have run into a wall in the U.S., where inventories have increased for the world’s biggest oil consumer for an eighth week in early March at a record 520.2 million barrels. Oil production in the shale belt is indeed increasing. U.S. drillers added rigs for the seventh straight week in early March, according to Baker-Hughes. Rig counts rose to over 600, the most since October 2015. Rig counts were over 1,300, peaking in mid-2014., before starting to decline.

When senior executives in the oil industry met a year ago in Houston, Saudi Arabia’s energy minister has harsh words for U.S. shale drillers struggling with the worst price crash in a generation. “Lower costs, borrow cash, or liquidate,” said Ali Naimi, who managed the world’s largest energy exporting business for more than two decades. In the year since, the drillers have largely taken Naimi’s advice. While more than 100 have gone bankrupt since the start of 2015, the companies that survived have reshaped themselves into fitter, leaner and faster versions that can thrive on oil at $50 a barrel. Now it is OPEC seeking solutions, trying to drive up prices to repair the economies of the nations it serves. “The shale business is rejuvenated because of the difficulties it has been through,” said Ben van Beurden, the chief executive officer of Royal Dutch Shell.

After the two year downturn spurred by oil’s plunge from more than $100 to $26, U.S. oil production is on the rise again. The number of drilling rigs have grown more than 90% to 609 in just over nine months. Production has gained more than 550,000 barrels a day since last summer, rising just under 9 million barrels a day for the first time since April. And as shale returns with a vengeance, it’s not just the pioneer cowboys that dominated the first phase of the revolution in the Bakken of North Dakota. This time, Exxon Mobil Corp. and other major oil groups are joining the rush. It’s a new reality that OPEC and Russia, the main force behind the production cuts as a solution to re-balance the global market, are beginning to acknowledge. “With $55 a barrel, we see everybody is happy in the U.S.,” said Didier Casimiro, a senior executive at Moscow based Rosneft PJSC.

Long a leader in multi-million dollar oil developments that took years to build and even longer to profit. Exxon is diverting about one-third of its drilling budget this year to shale oil fields that will deliver cash flow in as little as three years. Add to the mixture, the election of Donald Trump, who promises fewer regulations, added pipelines and energy independence and the mood at CEREWeek, the conference that was so gloomy the last two years, was much brighter this year. “North American oil companies are going to increase their spending by 25% in 2017 compared to last year,” said Daniel Yergin, the oil historiancum-consultant who hosts the CEREWeek conference. “The increase reflects the magnetism of

U.S. shale.”

So far this year, U.S. energy companies have raised $10.5 billion in fresh equity, with shale and oil service groups drawing the most investment, the best start of the year since 1999. The growth in activity is more than matched by growth in productivity. Oil companies can drill a well for about $5.5 million, down 56% from 2013. Thanks to new fracking techniques, the wells are yielding more barrels than ever. The average Permian well gushes 668 barrels a day, compared to 98 four years ago. “The bottom line is we think they can produce as much oil out of the Permian as they want to,” said Greg Armstrong, boss of Plains AllAmerican Pipeline. “It’s a matter of rigs, just a manufacturing process. And the revival isn’t just confined to the Permian, which stretches from Texas to New Mexico. Drilling is increasing in other shale pastures, such as Scoop and Stack in Oklahoma and in the deep water oilfields.

What does this mean to the price of oil, the OPECV cuts and shale increases, in a word, stability. As long as domestic producers don’t over-produce and OPEC doesn’t cut production too deeply, prices are likely to stay balanced in the $50-$60 dollar a barrel range. The chief risk is overproduction, whether it’s OPEC cheating, or too much domestic output, acts that would send prices falling again. There is of course, a possibility of a recession, either global or domestic, which would also send prices falling again. However, for the foreseeable future, the oil business looks fairly stable, good for domestic production, as long as prices stay range-bound. The very recent slide of WTI to below $50 does raise new questions about excess inventories and potentially lower prices that hurt the domestic market so forcefully in recent years. The one thing that we don’t have to worry about is shortages, at least for quite some time.