Why America’s Shale Won’t Derail the Oil Rally

For the first time in nearly a decade, OPEC has good reason to believe that its control over the global oil supply will not be ruined by increased crude oil production in the United States. The continued restriction of drilling activity in the shale area would greatly facilitate the efforts of OPEC and its allies in the OPEC + group to manage supply to the market this year.

Last week, OPEC + was reportedly informed by major international forecasters, including the Energy Information Administration (EIA), the International Energy Agency (IEA), Wood Mackenzie, IHS, Argus Media, Energy Intelligence and Energy Aspects US crude oil production would grow by just 200,000 barrels per day (bpd) this year, OPEC sources said Reuters at the end of the meetings of the economic and technical think tank of OPEC, the Council of the Economic Commission.

For 2022, views range from production growth of between 500,000 bpd and 1.3 million bpd.

Overall, the general opinion among external forecasters was that the shale area would not rush accelerating activity and production rates despite high oil prices. It’s so different from the previous behavior of US oil producers, who used to prioritize production over profit, contributing to oversupply in the market and lower oil prices.

But after the second major drop in oil prices in five years, the shale area held back drilling activity in 2020 and continues to watch out for capital spending, prioritizing returns to shareholders on production records.

Related: Is China Finally Moving Away From Coal? U.S. production has hovered around 11 million bpd in recent months, down 2 million bpd from record highs in early 2020, before the pandemic slammed demand and lowered oil prices.

First quarter results and conference calls from US producers highlighted unprecedented restraint on the part of state-owned shale companies. Listed producers have generated record cash flow, but they are not reinvesting most of it in drilling. Instead, shale operators now channel cash flow to reduce debt and reward investors.

OPEC itself sees average U.S. crude oil production this year at 11.2 million bpd, down 120,000 bpd year-over-year, the cartel said in its latest Monthly Oil Market Report (MOMR) for June.

“Despite the current trend of resumption of crude oil production in the United States, particularly in the Permian Basin, and the expected output rate of 11.6 mb / d in December 2021, the average US crude production in 2021 will remain 0.12 mb / d, year-on-year, below 11.2 mb / d ”, according to OPEC estimates.

The EIA expects U.S. production of crude oil at 11.1 million bpd on average in 2021, according to the latest June short-term energy outlook (STEO).

Next year, US oil production is expected to grow 700,000 bpd to an average of 11.8 million bpd.

“Because West Texas Intermediate crude oil prices remain above $ 60 / bbl in 2021 in the current forecast, we expect producers to drill and complete enough wells to increase 2022 production from levels. 2021, “the EIA said.

Related: China Reports Major Oil And Gas Discovery At Record Depths

Even the EIA’s forecast for next year’s output growth is moderate, especially compared to growth rates between 2017 and 2019.

The expected growth of 1.3 million bpd at the top of external forecasters OPEC heard from last week may be overly optimistic as growers continue to be under pressure to deliver in terms of yields instead of spending all of the money. cash on hand, and more, at drilling David Blackmon, Texas-based energy analyst and consultant Remarks at Forbes.

Slow growth rates in the US shale patch – if the forecast materializes – would give OPEC + more clarity on short-term supply outside the alliance. Restricting drilling in the United States gives OPEC more control to manage the market with its ongoing production cuts.

The OPEC + group is currently relaxing these cuts, but it still keeps around 5.7 million bpd out of the market.

“What is clear, however, is that OPEC + remains firmly under control as global demand continues to recover. At least until non-OPEC + producers respond to the increased demand. revenue and profitability by increasing production ”, Ole Hansen, Head of Commodity Strategy at Saxo Bank, mentionned Friday.

The OPEC + meeting on July 1 is expected to decide on policy from next month. Decisions taken at that meeting “would send a clear signal” whether the alliance will seek even higher prices by keeping supply artificially tight, or whether it prioritizes stability through increased production, Hansen noted.

By Tsvetana Paraskova for OilUSD

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