A form of cognitive dissonance seems to take over oil market spectators, a kind of blind belief that US oil production will grow and grow at an aggressive rate indefinitely. This erroneous belief seems to be the underlying cause of much of the pessimism regarding oil price prospects in the coming years. It is undeniable that US shale growth over the past few years has not been phenomenal, but the American shale industry is not geological and economic resources.
Post the OPEC + meeting in early July, a number of market commentators OPEC + to pursue a policy of strategic patience. On July 2, nd the Financial Times published an article under the scam : "OPEC is stuck in a production cut cycle, it can't get out of it". On July 3, rd CNBC published a similar eerie prediction: "Defensive OPEC Alliance has no clear play" in a period of abundant supply, expert said. "4th of July th The Economist published a critical article entitled" OPEC's Predictable Agreement Cannot Hide Its Giant Problems. "
The support of the above articles, as well as many others such as them, is This: US shale oil growth is almost unlimited and OPEC is fighting for a lost cause, this type of story is attractive to many, because OPEC represents much of what the West dislikes: Many of OPEC's autocratic members have had a confrontational relationship with the West at some point and OPEC's fundamental goal of dealing with the oil supply is antithetical to the Western idea of free markets, although considering the current level of Western governments and central bank market intervention, one wonders whether the latter is still a concern. The fact that Russia, the West's classic nemese, plays a supporting role for OPEC, has only made the organization more off-putting. [1
Desirable thinking aside, is OPEC really losing the shale war? Is OPEC really stuck in an infinite supply cycle, can't it get out? To answer these questions, you need to define what means to win? Are we measuring to win by market share? Revenue? Profit? Book? Reading the aforementioned articles, the overwhelming goal of success seems to be the level of production and market share. Not aware of the obvious streams of focusing solely on production regardless of financial returns, we can investigate data from a production level viewpoint:
In 2014, OPEC produced 30.6M barrels per day before the shale caused oil price rupture (OPEC Annual Statistical Bulletin). In Q1 / 19, OPEC produced 30.4M barrels per day (OPEC MOMR). A clear review of the data indicates that OPEC has barely reduced its production since 2014. Furthermore, if one were to exclude Venezuela and Iran from the calculation due to US sanctions, it would be noted that OPEC production actually increased during this period from 24, 8M bpd to 26.8M bpd, or a 2M barrel increase. In terms of market share (excluding Venezuela and Iran), OPEC's market share increased from 26.8% in 2014 to 27.1% in the first quarter. Thus, one wonders about the truth of the research that underlies much of OPEC's press criticism.
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Since 2017, After attempting and failing to destroy the United States slate in 2015/2016, OPEC, in collaboration with Russia, has pursued a very sharp strategy to open a US slate path to demand a slice of the market with minimal market disruption possible. Many of OPEC's critics seem to believe OPEC lacks a long-term strategy, but this is far from accurate. In fact, the Saudi oil minister, Al-Falih, said so much on July 1, : "I have no doubt that US slate will top, plateau and then fall like any other pool in history." In December 2018, Russian Energy Minister Alexander Novak is in a similar position by doubting that American slate has the ability to grow in the medium term.
Initially, OPEC and Russia are planning to wait for the strong growth phase of US slate, and the reality is that they probably do not have to wait too long. US shift growth due to a number of geological, economic and logistical factors is set to slow down in the early 2020s. Rystad Energy, one of the strongest believers in US slate, expects US production growth to drop significantly as early as next year:
(Click to enlarge)
Having grown by 2.1 MB of GDP in 2018 , Rystad expects the US increase in oil production will fall to 1.3M bpd in 2019, followed by another decline to 900K bpd bpd by 2020. In another way, Rystad expects the growth in US oil production to fall by 60% between 2018 and 2020 Rystad is not alone, the EIA, in its latest STEO forecasts US crude production growth to slow slowly from 1.4M bpd in 2019 to 900K bpd in 2020, or a 35% reduction in the growth rate in one year. The IEA is no different, and it expects a slowdown in US liquidity growth from 1.7M bpd in 2019 to 1.3M bpd in 2020. Developments in all of these forecasts are unmistakable: US output growth is set to fluctuate sharply from 2020, and It will only get worse down the line as the sheer size of US oil production, and the industry's persistent inability to generate positive cash flow will make significant production growth even more difficult to maintain.
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Nothing captures the demoralized spirit of American slate producers like Scott Sheffield, CEO of Pioneer Natural Resources, back in 2014, Sheffield claimed that Pioneer would produce 1m barrels of oil equivalent by 2024. Last month, Pioneer's CEO returned this high target in an interview with the Wall Street Journal. Today, it is not referred to as the one million goal in any of Pioner's investor slides after many such references were made in recent years. Recently, Steve Schlotterbeck, former CEO of EQT, marked the shale gas revolution as an "unmanned disaster", while listing a total of 172 North American E&P companies, with nearly $ 100B in debt filed for bankruptcy since 2015, and highlighting 80 % loss of value for the remaining key players. Echoing Mr. Schlotterbeck, Scott Sheffield at Pioneer Natural Resources said to this WSJ: "We lost the growth investor, now we must attract a whole different set of investors." (Translation: Now that we have lost the trust (and the money) to the first group of gullible investors, we need to find a new set of naive investors.). Over the past 10 years, 40 of the largest independent oil and gas producers spent around $ 200 billion more than they received from Wall Street Journal operations. Pierre Andurand, one of the world's foremost oil traders, points out that the US E&P industry is over $ 300 billion since 2006, and the industry's valuable destruction to half a trillion dollars since 2003.
Despite all of the above, it is unlikely American slate production to reject or even stop at any time soon, especially now as super majors that Exxon and Chevron have moved into Permian. But what is clear and what really matters for OPEC (and Russia) is not the absolute level of US production growth as much as the rate of this growth. Several data points and a number of reliable forecasters signal an imminent flattening of production growth in US shale, and as this flattening takes place, OPEC will again assume ownership of the oil market. Conclusion
While the US slate industry has grown significantly since the oil price breakdown in 2014, OPEC's core members have managed to protect and increase their market share. Most importantly, the increase in US oil production has drowned the US E&P industry in red ink: nearly 200 E&P companies have filed for bankruptcy and hundreds of billions of dollars in US energy market values have been lost. Furthermore, the E&P industry has lost access to the debt market and stock markets, while industrialists are forced to admit their mistakes, change their paths, and lose their rosy production forecasts. Ed Morse, head of the Commodities Research at Citi Bank, had this to say about OPEC's decision to expand production cuts:
"The countries involved have no clear endgame other than pushing back the inevitable time when the abundance of supply abundance can no longer It is hard to know whether Mr. Morse, a respected market veteran, really believes in his own statement. The OPEC + policy is awaiting a projected flattening in American shift growth is the literal definition of a playoff. When it comes to "abundance of supply", there is not as much oil as it is of cheap capital, and now that Wall Street has closed money spikes, the illusion of unlimited American shift growth is soon destroyed.
By Nawar Alsaadi for Oilprice.com
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