OIL BELOW $60 THIS YEAR – SAUDI STRUGGLES AS SHALE DRILLERS ARE BACK

Will crude oil prices rise above US$60 a barrel this year? It’s not too much to ask considering the black gold once traded around US$120 a barrel in 2014. Before we could even think of US$60 price tag, the Brent has to breach US$58 first. So far, it hasn’t been able to do so. Analysts generally predict that oil prices will remain below US$60 this year.

If crude oil prices remain below US$60 a barrel this year, however, it would be a problem for Saudi Arabia. The kingdom will be forced to burn its foreign reserves. From its peak in August 2014 at US$745.7 billion, Saudi was left with US$543.8 billion in October 2016. That’s about US$200 billion burnt in 2 years – averaging US$100 billion per year.

Saudi Arabia Oil Production - Oil on Currency

The collapse of oil prices – from US$115 in 2014 to US$30 in 2016 – started when the arrogant Saudi Arabia declared an oil price war with U.S. Shale. OPEC was used as the vehicle to drive away Shale players out of business, or so Saudi thought. Saudi engineered the collapse of oil price by increasing OPEC’s production levels.

In 2015 alone, more than 130 North American oil and gas companies filed for bankruptcy. However, Saudi experienced worse consequences as the country’s fiscal deficit increased to almost US$100 billion in the same year. After 2 years in anti-Shale oil war with the U.S., Saudi finally concedes defeat as it hurts the kingdom more than the shale oil producers.

US Shale Drillers

By end of 2016, Saudi led members of the oil producers’ cartel in a pledge to remove 1.2-million barrels a day from global oil production. The size of the proposed cut, the first since 2008, caused a surge in Brent oil prices to above US$50 a barrel. Non-OPEC countries such as Russia were supposed to cut 300,000 barrels per day.

Overall, OPEC’s production fell to 32.17 million barrels a day in February, a 65,000 barrel-a-day drop from January, 2017. Russia, after having cut 117,000 barrels a day in January, has refused to cut in February. OPEC Secretary General Mohammad Barkindo finally admits that non-OPEC countries who had initially agreed to the deal are dragging their feet.

US Oil Rig Count - Chart - 6March2017

But the biggest problem isn’t Russia not keeping its promise. The major problem to Saudi Arabia and his band of OPEC brothers is the rise in U.S. Oil Rigs. It rises to 609, the 7th straight rise, as of last Friday’s Baker-Hughes Rig Count – the highest level since October 2015, but still about 1,000 rigs below the 2014 peak.

In fact, the U.S. oil and gas industry is expected to boost spending this year by about 35%. Speaking at the Davos World Economic Forum, the International Energy Agency’s (IEA) Executive Director Fatih Birol revealed how US shale producers could rapidly increase their production – again. Shale producers could expand their output by as much as 500,000 barrels per day this year.

Oil Drillers

Since the collapse in crude oil prices, there have been major improvements in shale drilling. New rigs have slashed the time it takes between starting a new well and moving to another well to 7 to 10 days from 3 to 4 weeks. In the Permian’s Delaware basin, the average break-even price – including drilling and completion costs, operating expenses and royalties – was US$32.16 per barrel.

If U.S. record high inventories fail to drop, OPEC is said to do another round of production cut, after the original cut expires at the end of June this year. However, if the cartel decides at its meeting in May to cut or extend the period of the supply cut, it would only give more confidence to U.S. shale drillers to increase output at higher oil prices.

Saudi Aramco - Waiting Area

For now, the educated guess is that Saudi prefers a stable and higher crude oil prices so that its Aramco IPO will attract investors. One has to remember that it was the same Saudi that had engineered the production cut plan to push up the oil prices. Aramco’s valuation is important for Saudi Arabia because it will determine how much money the government makes from the IPO.

Either way, U.S. shale producers are laughing all the way to the bank seeing how Saudi Arabia is doing the heavy lifting of ensuring the oil prices do not collapse. President Trump’s backing to controversial pipeline projects – Keystone XL and Dakota Access – means U.S. crude oil production is expected to rise. The U.S. has emerged as the most powerful player in the oil market.

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