US Shale Oil Producers Falling To OPEC

US Shale Oil Producers Falling To OPEC

$OIL, $USO

Gulf country sources believe that low prices have so far been successful in stimulating demand for Crude Oil

After almost a year of low Crude Oil prices, OPEC members believe they are winning against the US shale producers in a short-term market share contest.

Insiders and experts say OPEC is looking for a longer-lasting impact on other high-cost production oilfield plans, many in deep oceans, with bigger time scales, even if that means a period of cheap prices lasting for years.

Privately, OPEC’s core Gulf members say they have resigned themselves to the idea that the US shale industry’s high-tech flexibility means it will respond quickly when prices start rising again, making the United States the new swing producer in world Oil, the role held for so long by Saudi Arabia.

“The Oil surplus is slowly being drawn from the market. US Crude Oil production is expected to fall to less than 9-M BPD by the end of this year or early next year,” said an OPEC delegate from a Gulf producer.

“But there is one point that no one is looking at which is the delay in the longer-term oil projects, these are 4 to 5 year projects. The postponement of these projects will impact the overall supply in the market.”

The short investment cycle of US shale, where it takes about few months before returns are seen, make it the most sensitive to oil price fluctuation — either way.

Thus the spike in Crude Oil prices in June where WTI  was trading above 60 a barrel drew out more shale output but the price drop in August will reverse that, OPEC sources say.

And even if rising prices pushed supplies up again, in the long run, higher production from shale is expected to be offset by lower production from conventional high-cost offshore projects from countries such as Brazil and Mexico, the sources say.

“Shale will be a new swing producer of sorts,” said Yasser Elguindi of economic consultants Medley Global Advisors. “Because of its shorter investment cycle, when prices fall shale producers will be the ones to cut first, but likewise when prices go up, they will also be the first to bring up production.

“This complicates life for those who are looking at investments that have a 2 to 5 -year investment horizon. But again, the idea is to find the price level that slows down the rate of growth considerably to something more sustainable, and that takes more than 2 to 3 Quarters of lower Crude prices.”

The drop in prices has forced companies to free up capital to help balance their books at the expense of allocating cash to expensive new projects. In some cases, investment decisions have been delayed to allow more time to reset cost structures on projects.

Gulf Oil sources believe that low prices have so far been successful in stimulating demand for crude and will gradually impact the oversupply which will start to be more visible towards Y 2016 and beyond, a sign that Saudi Arabia’s new market share strategy was working.

In its new medium-term forecast, OPEC sees prices rising by no more than $5 bbl a year to reach $80 by Y 2020, with higher demand for the group’s Oil and lower supplies from other non-OPEC producers.

Though the demand for OPEC is higher than expected before, it is almost flat from current marks, suggesting that OPEC sees slow economic growth over the next couple of years and prices will remain depressed, OPEC sources say.

“Next year the oversupply will put pressure on prices, and that’s why no one is expecting 100 bbl Crude til Y 2040,” said one OPEC source.

Saudi Arabia is holding the line regardless of how low prices may fall and is in it for the long haul, sources and analysts say.

Remember what the Saudi oil minister said last year, even if prices fell to $20 bbl, OPEC will not cut.

Have a terrific weekend.

HeffX-LTN

Paul Ebeling

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