Won’t get fooled again?

It’s not even been four years.

In April 2013, then Saudi oil minister Ali Naimi said there was nothing to fear from shale oil production in the US. A few days later, Naimi adviser Ibrahim al-Muhanna told Gulf Co-operation Council oil ministers that any concerns they had that shale oil would lead to a huge increase in supply and a collapse in prices were “misplaced”.

Four years. In an Opec member state, that’s the lead time for a decent-sized oil and gas project. In Texas, that’s enough time for a sector-shaking industry to rise, fall and rise again.

In Houston this week, Naimi’s successor, Khalid al-Falih, said the second coming of US shale is not worrying Saudi Arabia, “despite what you hear”.

But then hearing anything was made difficult by the noise created by a fresh increase in US crude inventories. Coming just as the refinery maintenance season gets into its stride, the crude price buckled and any flat price benefit created by recent Opec production cuts vanished.

No wonder al-Falih said the recovery in US production was “maybe too fast”. But the thing with the US unconventional sector is that it is built for speed.

The pace of change surprised everyone first time around — US drillers and Opec ministers alike. No excuse for astonishment this time – the CeraWeek conference in Houston heard grand claims for the future of the Permian, and the EIA raised its US output forecasts for this year and next. You have been warned, was the message from the floor.

And the IEA’s Oil Market Report 2017 (OMR 2017) said 2017 US tight oil production will be 500,000 b/d up from 2016, using a Brent price of about $60/bl as a base-case assumption. US tight oil output is expected to be 1.4mn b/d higher by 2022 under the base case, the report said. At $80/bl, the increase could be 3mn b/d.

“We are witnessing the start of a second wave of US shale growth and its size will depend on where prices will go,” as US shale supply has proven to be price elastic, IEA executive director Fatih Birol said.

(That’s one thing Saudi Arabia got right about US shale – that it would put a floor under crude prices. It’s just that Riyadh thought that price would be more like $70/bl).

What hasn’t changed in the past four years is this — the two competing forces are still moving at different rates.

Opec’s six-month deal to limit production means little when US drillers can ramp-up output in six weeks. US companies have ready access to a skilled workforce and abundant capital. They set up, frack away and move on; Opec, in contrast, moves glacially. It spent a large portion of last year tying up an agreement to limit production to where it was when those negotiations began.

Opec now faces a dilemma. Does it roll over the output deal, at the risk of encouraging yet more production in Texas? Or does it call it a day, and try to assemble another coalition of the willing towards the end of this year? Smaller producers that signed up to the deal may be looking at strides made by those that did not, and pondering the worth.

It’s not even been four years.

Leave a Reply

Your email address will not be published. Required fields are marked *

*