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Page added on December 8, 2015
OPEC vs. the U.S. Oil Boom
After a year suffering the economic consequences of the oil price slump, OPEC is finally on the cusp of choking off growth in U.S. crude output.
The nation’s production is almost back down to the level pumped in November 2014, when the Organization of Petroleum Exporting Countries switched its strategy to focus on battering competitors and reclaiming market share. As the U.S. wilts, demand for OPEC’s crude will grow in 2015, ending two years of retreat, the International Energy Agency estimates.
While cratering prices and historic cutbacks in drilling have taken their toll on the U.S., OPEC members have also paid a heavy price. A year of plunging government revenues, growing budget deficits and slumping currencies has left several members grappling with severe economic problems. The fact that the U.S. oil boom kept going for about six months after the group’s November decision also means OPEC has so far succeeded only in bringing the market back to where it started.
“It’s taken a hell of a long time and it will continue to take a long time — U.S. oil production has been more resilient than people thought,” said Mike Wittner, head of oil markets research at Societe Generale SA in London. “The bottom line is the re-balancing has begun.”
OPEC abandoned its traditional role of paring production to prevent oversupply last November as a tide of new oil from the U.S. eroded its share of world markets. The group chose instead to keep pumping, allowing the subsequent price slump to squeeze competitors with higher costs. The group didn’t discuss capping output when its representatives met in Vienna Wednesday with non-member countries including Russia.
Shrinking Shale
The plan appears to be working. Oil remains 34 percent lower than when OPEC revealed its strategy on Nov. 27, trading for $47.63 a barrel at 3:18 p.m. in London Wednesday. U.S. crude production has retreated about 500,000 barrels a day from the three-decade peak reached in June to 9.1 million a day in the week to Oct. 9, according to data from the Energy Information Administration.
The losses will accelerate next year with a drop of 390,000 barrels a day in annual average production to 8.86 million barrels a day, according to the EIA. OPEC’s fortunes will improve as the U.S. declines, with the IEA predicting demand for the group’s crude climbing to 31.1 million barrels a day next year from 29.3 million in 2014.
“Their strategy is still working for them,” said Miswin Mahesh, an analyst at Barclays Plc in London. “It means pain now, but in the medium-to-long term they will reap the fruits of a more balanced market, moderated shale supplies, growing demand for oil and ultimately a higher price.”
Fragile Economies
The pain has been considerable. The average price of a selection of OPEC’s crudes has been about 46 percent lower this year than in 2014, equivalent to a loss of export earnings of roughly $370 billion.
Saudi Arabia, the main architect of OPEC’s new strategy, will have a budget deficit of 20 percent of gross domestic product this year, the International Monetary Fund estimates. While the kingdom has been able to tap foreign currency reserves and curb spending to cope with the slump, financial assets may run out within five years if the government maintains current policies and prices stay low, the IMF said Wednesday.
Less wealthy OPEC members have even fewer options. The threat of political unrest is mounting in the “Fragile Five” of Algeria, Iraq, Libya, Nigeria and Venezuela, according to RBC Capital Markets LLC.
Game Plan
Venezuela, whose currency has lost 87 percent of its value on the black market in the past year, is urging fellow OPEC members to reverse course and curb production to support prices. Technical talks on Wednesday between officials from OPEC and non-members ended without any discussion of output caps or restoring a target price, Russian Energy Ministry official Ilya Galkin said. Speaking before the forum, Venezuelan President Nicolas Maduro had pledged the country would present evidence on the need to revive prices to $88 a barrel.
Iran agrees that OPEC ought to reduce output to engineer a price recovery to $70, but it’s doubtful the group will enact any measures to do this, the nation’s Oil Minister Bijan Namdar Zanganeh said Oct. 19. The Persian Gulf nation is planning to boost its own output by 1 million barrels a day next year if international sanctions are lifted.
Faltering U.S. supplies show the Saudi-led strategy is paying off, said Societe Generale’s Wittner. “If there are folks in the oil market who expect this is going to end with a new game plan, they’re going to be very disappointed,” he said.
22 Comments on "OPEC vs. the U.S. Oil Boom"
Brent on Tue, 8th Dec 2015 5:46 pm
Ok I have been reading this website for a while now and this question is really for the rockman, but if anyone has any info on this please contribute. The question is simple how fast now are we expecting to see shale oil dry up? I thaught that shale oil has a fast decline rate but it has kept production steady for the last year. When is the best estimate as to when we can start seeing significant amounts of shale oil leave the market and go out of production? Thanks
ennui2 on Tue, 8th Dec 2015 6:11 pm
There’s a difference between drilling stopping and not having anything to drill for. Peakers aren’t going to be able to tell the difference and will interpret the former to mean the latter.
twocats on Tue, 8th Dec 2015 7:10 pm
I like that ennui isn’t even waiting for a response before attacking the straw man. That’s a can-do attitude!
apneaman on Tue, 8th Dec 2015 7:46 pm
ennui is a fucking retard. Constantly pretending his opinion is fact.
Boat on Tue, 8th Dec 2015 9:56 pm
Brent,
That is easy and hard to answer. Individuals wells do dry up quicker but most of the recent wells drilled produce more overall and get most of their oil in the first 2-3 years.
But most of the wells are drilled in smaller pockets known for decent production. Many are still making money at $40 barrel oil.
2nd but, the drilling rig count continues to drop but there are still around 735 are still kicking. How many more drilling rigs will be taken offline and at what pace is a better question for Rock.
3rd but, What will geopolitics do to the market. Will Iraq continue to increase production at $40 and cheaper production.How much will ISIS control Iraq’s destiny. How much will Iran produce a year from now and the years that follow.
The price of oil only determines where the oil is produced. The middle east has plenty and can produce it cheaper. But as we know it is a volatile region. If the middle east was a nice quiet place that loved capitalism there never would have been spike in prices and fracked oil would still be in the ground. IMO
The simple answer is fracked oil will go away when enough cheaper oil is on the market.
Brent on Tue, 8th Dec 2015 10:09 pm
Boat,
Thanks but I am mainly asking about fracking because I believe when the American people finally wake up to the fact that shale oil is not coming back I think that is going to be when the shit will stat to really hit the fan.
Boat on Tue, 8th Dec 2015 10:18 pm
Brent,
It is ok to agree to disagree. There is tons of oil to be fracked at a higher price. The shale oil will be produced at some point down the road. Shale gas is kicking ass. The price of oil determines where the oil is produced with a profit. A lot of fracked oil needs $65-$100 was taken off the market because of war there would be a huge shortage. Maybe $200 a barrel and higher as a result. Frackers would go ape shit and production would boom.
apneaman on Tue, 8th Dec 2015 10:25 pm
Boat isn’t it funny that everywhere there are “American interests” it just happens to be a volatile region. The united fruit company had that problem back in their time. They found a solution.
The Empire Files – The U.S. School That Trains Dictators & Death Squads
https://www.youtube.com/watch?v=GUtumGk0E6Q
GregT on Tue, 8th Dec 2015 10:47 pm
“If the middle east was a nice quiet place that loved capitalism there never would have been spike in prices and fracked oil would still be in the ground.”
You’re comments just keep getting more and more ridiculous Boat. Oh my, how you do go on………….
Boat on Tue, 8th Dec 2015 11:04 pm
GregT,
Read more, you will find the earth is much different than you think.
apneaman on Tue, 8th Dec 2015 11:18 pm
Boat, how about you reccomend the last book you read.
I just finished: In The Shadow Of The Sword: The Battle For Global Empire And The End Of The Ancient World, by Tom Holland.
No pictures, so I doubt you would get it, but I recommend it nonetheless.
GregT on Tue, 8th Dec 2015 11:20 pm
Like I said above Boat,
“You’re comments just keep getting more and more ridiculous.”
What’s even more ridiculous? You don’t appear to have the foggiest notion as to understand why.
Brent on Wed, 9th Dec 2015 12:07 am
Boat,
I was not disagreeing with you in our conversation. I believe that some fracking might come back after the price rises again. But again my question is now that the price of oil is low and what this article is saying is that companies are cutting back. I am trying to get and educated/reasonable predication of how fast shale oil will decline. Not talking about the middle east I want to know about America.
GregT on Wed, 9th Dec 2015 12:15 am
The last book that I read that described how the Earth was much different that I thought Boat, was “The Universe in a Nutshell” by Stephen Hawking. That was before he started to lose it.
GregT on Wed, 9th Dec 2015 12:19 am
Brent,
If you are looking for any kind of an educated, or reasonable prediction, Boat is the last person that you should be asking. There are plenty of educated and reasonable people that post here, Boat is neither.
rockman on Wed, 9th Dec 2015 7:08 am
“The question is simple how fast now are we expecting to see shale oil dry up? I thought that shale oil has a fast decline rate but it has kept production steady for the last year.” Actually look at their chart closely: they shoot themselves in the foot to some degree. They show a significant decrease in the INCREASE in US oil production. But they then show a fairly flat and SMALL increase since Sept…but an increase none the less.
There are three main components to US shale production. A) The base production of shale wells that have passed thru their high decline rate phase. Those rates are low but there’s a huge number of those wells. B)More recent wells that are still in their high decline rate phase. High decline rates but there are relative few of them compared to the A wells. And C…the wells not being drilled compared to a year ago.
Thus the great majority of the existing shale wells are declining slowly. And while not as many new wells are being drilled there are still thousands/year being drilled. Thousands that are coming on at high rates. Bottom line: shale production will be flat to declining in the future. But there is no cliff to fall off. Always good to remind folks that the AVERAGE US oil well produces less the 15 bopd. And that the average shale well today produces more than 15 bopd.
Ralph on Wed, 9th Dec 2015 8:25 am
rock,
See peakoilbarrel. Overall, shale is now declining at about 20% annualised. Some fields are still growing, but others are cratering. Drilling has fallen by more than 50% and this is now showing up in the production numbers. The decline rate will ease off a bit if drilling remains stable at current levels, but as I doubt price will recover for at least another 6 months drilling may fall further.
Total US production is less dramatic because of Gulf of Mexico long lead times .
Brent on Wed, 9th Dec 2015 8:35 am
Thanks rock!!
Kenz300 on Wed, 9th Dec 2015 9:52 am
High cost producers are done………
Banks have stopped lending and want their money back…
If It Owns a Well or a Mine, It’s Probably in Trouble
http://www.nytimes.com/2015/12/09/business/anglo-american-to-cut-85000-jobs-amid-commodity-slump.html?emc=edit_th_20151209&nl=todaysheadlines&nlid=21372621&_r=0
rockman on Wed, 9th Dec 2015 10:44 am
Thanks Ralph. According to the EIA oil from the US shale plays dropped 118,000 bbls to 4.95 mm bbls. A 2.4% decline. That would actually be a 29% decline per annum. But only if that decline rate holds for the next 12 month. And this is where uncertainty and a lack of data makes building a good model impossible IMHO. Production from recent wells is probably falling at a rate higher than 29%. And obvious wells not being drilled don’t reduce the overall decline rate. OTOH the wells that are still being drilled to offset decline to some degree. But the vast majority of the older existing shale wells are declining at 10%/year or less.
The difficulty is trying to weight each component properly to come up with a reasonable net change in production model. It should be somewhere between the low end decline of mature wells and the high end decline of recent wells but also need to add gains from the wells still being drilled. I just don’t have a comfort factor that makes me think I could come up with a reasonable guess.
But there’s good news: since I don’t really expect much or any significant increase in oil prices for the next12 months then by this time next year we won’t need no stinkin’ model: we’ll have hard data. LOL
Boat on Wed, 9th Dec 2015 7:16 pm
GregT on Wed, 9th Dec 2015 12:19 am
Brent,
If you are looking for any kind of an educated, or reasonable prediction, Boat is the last person that you should be asking. There are plenty of educated and reasonable people that post here, Boat is neither.
Thank you for your normally brilliant anlyase
GregT on Wed, 9th Dec 2015 7:31 pm
Your welcum Boat, for my normally brilliant anlyase.
Whatever that means…….