Recently oil prices found a bracer from production cuts by the Organization of the Petroleum Exporting Countries, OPEC and other producers. The OPEC and non-OPEC producers agreed to output reduction in November 2016, to shore up prices that plummeted in July 2014. The OPEC attempt to reclaim price seemed to have fired another salvo that has pitted its wit against American shale.
A price war seems to be brewing over the production cuts that took effect last January. Two years on negotiations by OPEC Ministers culminated in last November’s Vienna meeting deal in hand for production cuts to shore up prices. The successful dousing of production output and market share tensions from OPEC producers reverberated in the United States which brought a renewal of interest in shale production hitherto in limbo.
Projections are that prices in the high 50s or low 60s would attract more American investors deploying technology to bring more rigs to production. Many are however watching their flanks because the second half of the preceding year showed perceived signs of good tidings which became turbulent. OPEC’s production cut may be heading for the rocks with the American shale producers benefiting from the higher prices of oil freeze.
The US shale output is increasing just as the oil cartel commenced output cut from the 1.8 million barrels per day, MMbpd agreed to by OPEC and non-OPEC. Again the new administration of President Donald Trump is bent on increasing output of petroleum with his ‘America First Energy Plan.’ This may again trigger another round of animosities reminiscent of the last six years price war between OPEC led by Saudi Arabia and the United States. The United States drillers tested their might in output control from their ‘fracking’ shale oil technology that outpaced global oil supply from January 2011 to June 2014, to make America the number one oil producer.
The retaliation by Middle East producers’ led by Saudi Arabia between June 2014 and September 2015, led to increased production to dwarf the America’s dream. The richer ones from the Gulf States went along with the Saudis in the market share battle, while the poorer members of OPEC reluctantly accepted; a decision that became an evil with many oil dependent nations experiencing economic crises. But who wins the price-giver battle is again the controversy in the offing with global expectations that American shale output would increase this year.
The battle appears to have been drawn on the board game over which capture may checkmate the opponent’s king. Many OPEC members including Saudi Arabia had bitter experiences when oil prices crashed. Commentators believe that the market-share war involve too many unknowns. Based on the economics of petroleum production, it was thought that the price range of $50 to $60 meant that American shale producers and investors would be out of business. The Saudis according to expert report made sure that the low oil price drop lasts enough to exhaust oil pricing hedges, enough to cause banks to tighten credit, and cause investors to withdraw. The cost of Saudi production is between $10 and $15 a barrel.
The Saudis, the key player in OPEC did not reduce production in the face of global glut to get Americans out of production. To produce Bakken shale at the wellhead in 2014 was US$59.03 the breakeven cost per barrel, on average, which fell to $29.44 in 2016, according to consultancy Rystad Energy. Bakken is the most competitive of major U.S. shale though they pay more to transport crude to market than producers in most other U.S. regions. In spite of the 2014 uncontrolled output that drove some producers out of the market the two-year price war made shale producers more resilient and a stronger rival. Improved technology and drilling techniques have boosted efficiency for the North Dakota Bakken shale and the entire U.S. oil industry.
A price of $45 a barrel is enough for Bakken producers to profit and $55 would encourage production growth, said Ness. Petroleum Economist surveyed six banks and consultancies with Energy Aspects having the most bullish; forecasting an international benchmark for Brent will average almost US$66 per barrel in 2017 while BNP Paribas is the most bearish, with an average of US$50 per barrel across the year. Last year’s average was $43.55bpd. Oil prices had marginal falls this week with WTI closing at US$53.57 on Thursday fueling speculations that the US recovery mode may out way that of OPEC and non-OPEC supply cut deals. Is global crude oil price likely to experience another bearish spiral? From experts that track OPEC supply, compliance in OPEC target of 1.2 MMbpd cut by the first half of 2017 is believed to have recorded 82 percent supply cut at 984,000 bpd by the end of January 2017.
The Americans have increased rig deployments far and above their 2016 levels with the number of oil rigs deployed by last week put at 566 as against 498 for the same period last year. It is however not certain whether there would be significant difference in the projected global oil consumption estimated for about 95.41 million barrels per day in 2017 up from the 2016 demand of 94.26 MMbpd, a projection in the OPEC Monthly Oil Market Report published in August 2016. The OPEC deal is to cut 1.8 MMbpd from global output from January to end a two-year excess that brought down prices. A successful implementation of this target would replace more than half the barrels OPEC promised to eliminate from the market.
International oil price rally this year will depend on oil-producing nations upholding their side of the bargain to cut 1.8MMbpd from supplies globally. Iran was mandated to maintain production below a threshold of 3.8 MMbpd just below the 2012 sanctions output of 4MMbpd. Iranian Oil Minister Bijan Zanganeh said that crude production had reached 3.9 MMbpd to restore market links with Europe and Asia. When OPEC met in Vienna, Nigeria was given exempt status after suffering a year of violence and outages from the activities of Niger Delta militants. President Muhammadu Buhari believes output can reach 2.2MMbpd.
Evan Kelly of Oilprice.com reports that veteran energy trader Martin Tillier admits that while fundamental analysis usually outweighs technical analysis, there is a very strong case for a correction in crude. Tillier sees increased global demand figures along with OPEC cuts as bullish long term fundamentals, but finds short term technical more decisive in the near term. Who wins this war between the shalemen and the sheikhs in OPEC? It appears the American deployment of technology may be a problem for OPEC. President Trump is bent on reducing oil imports; so relying less on OPEC to meet domestic needs. Although the Saudis have enough fiscal sovereign reserves to gamble, the oilmen of Dakota since 2010, have new wells more than ten times Arabian score.