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Business Last Updated: Feb 14, 2018 - 10:16:46 AM


Opecs worst fear comes true as US energy dominance draws closer
By Ambrose Evans-Pritchard , Telegraph 14/2/18
Feb 14, 2018 - 10:06:25 AM

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The Permian Basin in West Texas may soon overtake the giant Ghawar field in Saudi Arabia Credit: Oil & Gas investor

Surging output of US shale oil has once again shattered the assumptions of Opec and the global energy establishment, pushing the crude market back into surplus and smothering the nascent boom.

The International Energy Agency said the world is witnessing the second great wave of US shale growth, with production soaring by 1.3 million barrels per day (b/d) over the last year. Extra US supply threatens to match the entire growth in crude demand from China, India, and the rest of the world in 2018.

This is a nightmare come true for the Opec cartel and Russia as they struggle through yet another year with production cuts of 1.8m b/d. It raises the prospect of endless attrition, a shale-driven slump that keeps cutting short the normal petroleum cycle and will soon have gone on longer than the First World War.

“The main message is very clear: in 2018, fast rising production in non-Opec countries is likely to grow by more than demand,” said the agency in its monthly Oil Market Report.

The agency said the price rally has "stalled" as the US smashes one record after another. “In just three months to November, crude output increased by a colossal 846,000 b/d, and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader,” it said.

Brent crude dropped 1pc to a two-month low of $61.84 on the gloomy forecast, off 12pc from its recent peak in late January. “The market simply got too bullish without pausing to consider the response of US shale. Short-cycle, price-elastic shale can flourish in the mid-$50 sweet spot, ” said Michael Tran from RBC.

America’s irrepressible shale frackers have been able to halve costs since the peak of the last bubble with a mix of ‘multi-pad’ sites, longer lateral bores, and precision drilling with ‘smart bits’ linked to computers. Most can flourish in a price band from $45 to $55, with the best locations in the Permian Basin of West Texas closer to $25. Output is growing as fast today as it was when oil was trading at over $100.


Permian output will hit 3m barrels a day in March, and may reach a stunning seven million within four years.  Credit: EIA

The US Energy Department expects output in the Permian alone to reach 3m b/d by March, up from 2m b/d  fifteen months ago. Bank of America is betting that production will reach 6.8m b/d within four years, vaulting past the giant Ghawar field in Saudi Arabia to become the world’s richest basin.

The winter jump in US crude prices to $65 a barrel ($70 for Brent) pushed up futures contracts along the maturity curve and deep into 2019 - helped by speculative buying by hedge funds and the usual cheer-leading from Goldman Sachs. This allowed drillers to secure funding and lock in forward sales, a process known as hedging. “It provides a license to drill,” said RBC.

The Baker Hughes rig count in the US has surged to a three-year high of 791. “All indicators suggest that continued fast growth in the US are in perfect alignment,” said the IEA.

The first week of February saw an explosive rise of 25 new rigs, validating once-outlandish claims by Washington that US output will top 11m b/d this year as the country ratchets up its ambition ever higher, from “energy independence” to what the Trump administration calls “energy dominance”. The US aims to be a net energy exporter by 2022 as exports of liquefied natural gas floods the world market.

“This is a sobering thought for other producers currently sitting on shut-in production capacity and facing a renewed challenge to their market share,” said the IEA. Another sobering thought is that US shipments of oil condensate (propane) are surfacing in the Persian Gulf. “Such a development would have seemed incredible a few years ago,” it said.

What is striking is that older fields such as Eagle Ford in East Texas or the Bakken in the Dakotas are having a second lease of life, able to compete at oil prices below the ‘fiscal break-even cost’ of Saudi Arabia and much of Opec. The petro-powers mostly need oil above $70 to fund their welfare and defence costs. Several still waste over 4pc of GDP on energy subsidies at home.

Saudi Arabia has stabilized its foreign exchange reserves at $490bn - down from $737bn in mid-2014 - but only by raising foreign debt and juggling its finances. The budget deficit is still running at over 9pc of GDP and the Saudis have launched a fresh fiscal expansion in 2018 to allay social tensions, betting a little too early that the latest oil rally will endure. The danger is that they might erode their safety buffers before the oil supercycle revives in earnest.

The IEA said excess oil inventories in the OECD bloc - defined as the margin above the five-year average - has dropped from 264m barrels to 52m barrels over the last twelve months. But stocks may already be rising again. New projects in Kazakhstan, Brazil, the North Sea, are coming on stream in the first half of this year, compounding the US surge.  

It is a complex market with many moving parts. The balance of supply and demand is fundamentally tighter than a year ago, with modest spare capacity if there is a geostrategic shock.  Helima Croft from RBC says ISIS has staged a comeback in Libya and is targeting the Oil Crescent energy facilities.

“The clear and present danger to watch is Venezuela, which arguably has progressed past the risk stage given that production is in free-fall,” she said.

The country has exhausted its foreign exchange reserves is surviving hand to mouth as its Russian and Chinese patrons lose patience. The state energy company PDVSA has run out of spare parts. Barclays expects output to slump by 700,000 b/d to 1.43m this year but it could be far worse.

Analysts WoodMac say global oil fields are declining at an annual rate of 5pc, taking 2.4m b/d out of production each year. This must lead to a supply crunch and fresh surge in prices in the end since there has been far too little spending on future projects. Upstream investment in oil and gas crashed by almost half to $430bn over the course of 2015 and 2016, and has been slow to recover. Rystad Energy says new discoveries in 2017 were the lowest since the 1940s.

Yet the risk for Opec is that the long-awaited relief will not arrive in 2018 and perhaps not even in 2019 if China slows. It is becoming painfully plausible - if not yet likely - that there will be no sustained boom for the oil industry before the next global economic downturn hits and leads to a fresh energy slump. If that happens, Opec itself risks spiralling into insolvency.


Source:Ocnus.net 2017

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