Oil prices are up on expectations that OPEC will contribute to a faster balancing in 2017, with up to 1.8 million barrels per day in cuts along with some non-OPEC countries. That has put a floor beneath prices, with fears of another downturn largely dissolved after OPEC's announcement.
But what if U.S. shale comes roaring back and ruins the price rally? Estimates run the gamut on how quickly U.S. shale production can rebound and by what magnitude. Citigroup sees output rebounding by 500,000 barrels per day if oil prices average $60 per barrel. A December 12 report from Macquarie said that oil prices above $60 could spark a 1 million barrel-per-day revival.
U.S. shale is already up about 300,000 barrels per day from a low point in the summer of 2016, at least according to preliminary data. The gains are expected to continue. The industry is producing about as much oil as it was two years ago, with only one-third of the more than 1,700 rigs in 2014. Drillers are producing just as much oil with a lot less effort.
If U.S. shale surges back by 1 mb/d as Macquarie suggests, it would offset most of the cuts from OPEC and non-OPEC countries. Additionally, one would have to assume some degree of non-compliance and/or "cheating" on the cuts from participating countries, plus an expected increase in supply from Libya and Nigeria. Altogether, a rise in oil prices could be self-defeating, leading to prices falling once again later in the year. Related: Oil Price Roulette: Investors Bet On $100 Oil
Then there are also the implications on oil demand to consider. Higher prices might cut into demand growth, leading to an expansion in consumption at a much slower rate. The IEA already thinks oil demand will grow by 1.3 million barrels per day in 2017, one of the weakest in years. An initial price spike might throw off those figures, causing estimates to end up being more optimistic than reality. Again, a price surge could be self-defeating, causing prices to fall right back down.
Bloomberg conducted a survey of 24 oil analysts, finding expectations averaging $53 per barrel in the first quarter and $56 per barrel in the second quarter. For the full-year, the survey calls for oil prices averaging $58 per barrel for 2017.
By Charles Kennedy of Oilprice.com
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Comments
According to the EIA's most recent report, U.S. tight oil production was 3.97 million barrels per day in October 2016, down 69,000 barrels/day from September and 680,000 barrels/day from the record high in March 2015.
October 2016 was the lowest point since June 2014.
http://www.eia.gov/energy_in_brief/article/shale_in_the_united_states.cfm#tightoil
- "A December 12 report from Macquarie said that oil prices above $60 could spark a 1 million barrel-per-day revival."
I haven't seen this report from Macquarie, but I'm sure they are not projecting year-on-year growth of 1 mb/d in U.S. tight oil production in 2017. Even with continuing growth in U.S. oil rig count and accelerating completion of the DUCs (drilled but uncompleted wells), tight oil output is unlikely to return to growth until the second quarter of 2017. And year-average production will be flat or only slightly higher than in 2016.
Even most optimistic forecasters, such as Rystad Energy, are projecting return to ~1 mb/d growth in U.S. tight oil production not before 2018. By that time, the global oil market will be largely rebalanced thanks to continuing growth in demand and OPEC-non-OPEC supply cuts (even if these are implemented only partially).
"The IEA already thinks oil demand will grow by 1.3 million barrels per day in 2017, one of the weakest in years."
According to the IEA statistics, annual average growth in global oil demand was 1.17 million barrels per day in 2000-2015. Hence, projected growth of 1.4 mb/d in 2016 and 1.3 mb/d in 2017 is above long-term trend. Furthermore, the IEA, EIA, OPEC and other forecasting agencies have been constantly increasing their demand projections for 2016 and 2017.
http://www.eia.gov/beta/steo/#/?v=9&f=M&s=&start=201201&end=201712&linechart=COPRPUS&ctype=linechart&maptype=0&id=
Since June, GOM has gone from an actual 1.54MM to a proj. 1.78MM for Dec. (that's +240K), whereas "shale" has gone from 6.70MM in June to 6.52MM for Dec. (that's -180K, w/+200 rigs)
"Every six months, oil and gas producers negotiate credit with banks based on the value of reserves in the ground. Through the latest round of talks in the fall, 34 companies had their available credit lines raised an average of about 5 percent, or more than $1.3 billion, according to data compiled by Reuters."
Can shale really increase production by 1MM BBLs/day with only $1.3BN more in capex spent?
No. By the time the spring re-evaluation is done, the first round of OPEC cuts will be in the books.