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Page added on June 11, 2017
Shale a sword of Damocles over oil
Opec and non-Opec members decided during their meeting on May 25 to renew their production agreement at current levels for another nine months.
In a joint statement Khalid Al Falih, the Saudi Arabian energy minister, and the Russian energy minister, Alexander Novak, stressed the need for an inventory target, rather than a price one. This decision, validating the million-barrel supply cut decided during the previous Opec gathering in November, was widely anticipated by market participants. It aims to reduce large commercial oil inventories that have reached a fresh high, 10 per cent above the five-year average.
So far, all signatories to the agreement have been very disciplined, the compliance rate to the current supply cut is close to 100 per cent, a very rare figure when compared with historic supply cuts. Saudi oil diplomacy has played a major role in initiating and maintaining this supply cut agreement. The market is almost balanced after three years of oversupply. In April, global oil supply reached 96.2 million barrels per day, almost the same level as in early 2015. On the other hand, demand is still expected to grow by more than 1.3 million bpd this year to reach 97.9 million bpd, meaning that inventories should start to reduce.
However, in this robust environment, oil prices have not rallied; Brent crude is still trading next to US$50 per barrel and has fluctuated in a narrow trading range in the past 12 months, between $43 and $52 per barrel.
The reason for this status-quo comes from the United States, the producer that has emerged as the troublemaker of the decade, with the development of the shale oil industry. This industry has benefited from a long period of oil price stability and low volatility between 2011 and 2014, not only to expand but also to generate strong productivity gains that have allowed US producers to reduce considerably their costs of production. US shale oil players have come a long way since they were sitting at the top of the cost curve. The recent recovery of oil prices, following the fall of 2014 and 2015, has allowed shale oil players to increase their capabilities and supply, sharing at the same time a good indication of their cost of production. The question is not anymore whether they can stay in business but how strong their supply growth recovery will be.
US oil supply has surged by 500,000 bpd since January 2017 and should increase more during the second half of the year because of vigorous drilling activity. The number of rigs in activity in North America has doubled since the lows of 2016 to reach 1,015 by the beginning of June, despite a shortage of equipment and crews, which has temporarily increased production costs. The profile of these shale producers, which are privately owned and economically driven in their decision to adjust their oil supply, offers a good predictability, but also constitutes a permanent threat to incumbent producers, thanks to their ability to adjust their production almost instantly to market prices.
Excluding major events that might create a disintegration of oil supply, future oil price appreciation is likely to be limited in time. Any additional rise in oil prices will bring back additional US competition to the game and Opec members and their allies will have no choice but to reduce their market share or to observe a new price drop. They have very limited options to counter them.
The resurgence of these US competitors is not a surprise, and they will act as a permanent cap on the market, not allowing oil prices to rise again to levels seen at the beginning of the decade, above $110 per barrel at their peak.
This new paradigm is a drain for many hydrocarbon-driven economies; their public budget revenues have already been halved in the past years. Their governments are still dealing with this transition, which looks set to continue for longer than expected.
Sebastien Henin is a managing director and the head of wealth management at Alienor Capital.
15 Comments on "Shale a sword of Damocles over oil"
Anonymous on Sun, 11th Jun 2017 1:43 pm
Shale was predicted (with good reason based on trends and rig counts) to go up 0.5-1 MM bpd at low 50s pricing. That is just too much supply. Therefore the market has reacted by cutting price to 45. This will slow the growth of shale. The difference from 45 to 55 really impacts a lot of projects that are on the borderline.
dissident on Sun, 11th Jun 2017 1:55 pm
There is no such thing as shale oil. There are shale kerogens which need to be cooked into synethetic oil at significant energy expense. There is not a single commercial or pilot shale kerogen to syncrude production facility on the planet. Tight oil is conventional oil trapped in shale-like (i.e. low porosity) rock formations. All these pump and dump shysters always try to fool the average investor sap into thinking that fracked shale oil is “shale oil”.
Anonymous on Sun, 11th Jun 2017 2:34 pm
Everyone understands the difference between shale oil and oil shale (kerogen). And it is becoming more and more common to hear people say shale oil (analogous to shale gas). Note that tight oil is not perfect either as it includes tight formations that are not ultratight like a shale. Also, for natural gas, tight gas is a specific thing different from shale gas.
http://econbrowser.com/archives/2012/07/shale_oil_and_t
Plantagenet on Sun, 11th Jun 2017 4:20 pm
You can’t blame the current oil glut just on shale. The oil glut is created by overproduction from all producers all around the world—-not just US shale oil producers.
Cheers!
q on Sun, 11th Jun 2017 4:34 pm
Oil will probably soon be free while bitcoin will be most valuable thing on Earth. 🙂
Go Speed Racer on Sun, 11th Jun 2017 8:32 pm
Noticing a cultural obsession with bitcoin lately, and a variant of it.
The variant is ‘Crowdfunded bitcoin’. That’s a
real weird one cause the phrase doesnt make any sense.
I find the ‘crowdfunded bitcoin’ to be like the
Amway ponzai pyramid scheme. They want you
to chip in $200 and then you have to get 2
of your friends each to chip in their $200
and the presumption is their friends, and
their friends friends friends, are going to
chip in $200.
The promise is when all this happens, you will
be infinitely rich thanks to your brilliance
to invest into crowdfunded bitcoin.
It looks to me like America just discovered
itself another Amway pyramid scammer scheme.
rockman on Sun, 11th Jun 2017 10:42 pm
A – First, “The profile of these shale producers, which are privately owned…”. There may be a few the Rockman has never heard of, but all the shale players he knows of are openly traded public companies. Which is one reason the shale plays boomed: the demand of pubcos to develop increasing stock value by increasing their reserve base. The Rockman has worked for more then one pubco where increasing the booked reserves were a priority over profitability.
Also: here’s a way to eliminate the confusion. Do we call oil production from a sandstone reservoir “sandstone oil”? From a carbonate reservoir “carbonate oil”? From a low permeability sandstone reservoir “tite sandstone oil” or “tite oil”?
Why don’t we just agree to call it what the f*ck it is: oil. LOL. Production from the Eagle Ford formation is not “shale oil” or “oil shale production”. It’s simply oil. Likewise condensate production from the EFS isn’t “lighter fluid” or any other made up tag. It’s also simply oil.
If someone what’s to add a tag onto it they need to be consist: such as production from Ghawar Field is “limestone oil” or from the Prudhoe Bay Field as “sandstone oil” or “limestone oil” since it has produced from both rock types.
That would solve any communities problem.
Anonymous on Mon, 12th Jun 2017 6:29 am
Rock more than 50 pct if recent RIG growth not total has been private. There are a lot of private players out there. Just don’t make the news.
rockman on Mon, 12th Jun 2017 2:28 pm
A – “Rock more than 50 pct if recent RIG growth not total has been private.” Not saying you’re wrong but what is your source?
I pulled up the largest privately owned companies from Forbes and the biggest petroleum company is #220 on the list. I’ll keep digging but I pulled up the top 32 oil companies in Texas according to the TRRC who produce 76% of our oil and they are all pubcos.
Rank
220 Hunt Consolidated/Hunt Oil
Revenue $2.12 billion. Employees 3,000
304 Camac International
Revenue $1.60 billion Employees 300
rockman on Mon, 12th Jun 2017 2:36 pm
Found this on Mostly Fool from Aug 2016:
The 5 Companies Dominating the Eagle Ford Shale Play
{All pubcos}
EOG Resources
3.2 billion BOE in recoverable resources
ConocoPhillips
174,000 BOE/d in production last year
BHP Billiton
125,000 BOE/d in production last year
Chesapeake Energy
105,000 BOE/d in production last year
Marathon Oil
109,000 BOE/d in production last year
Anonymous on Mon, 12th Jun 2017 6:16 pm
I don’t have a good source. Heard it somewhere. Sounds bogus actually.
Anonymouse on Mon, 12th Jun 2017 6:55 pm
Yes, Nony, sounds bogus, like pretty much all the rest of your assertions and comments.
rockman on Mon, 12th Jun 2017 10:20 pm
A – I had that feeling. But now that you mentioned it I would like to find a privco and see how they’ve done. Of course privcos aren’t required to give details.
Anonymous on Tue, 13th Jun 2017 1:21 am
https://www.forbes.com/sites/christopherhelman/2017/02/09/papas-permian-pure-play-an-american-oil-legend-returns/#3f4890e8727f
rockman on Tue, 13th Jun 2017 5:06 am
A – Not sure if you’re offering Centenial Resource Development as an example of a private company but they are another pubco. Stock had a nice gain from before it’s PB acquisitions but in the last two months the stock has dropped almost 25%.
https://www.google.com/search?site=&source=hp&ei=JLY_WdirGoPCmwGk3wM&q=centennial+stock&oq=Centennial+stoc&gs_l=mobile-gws-hp.1.0.0l3j0i22i30k1l2.2852.12535.0.14717.7.7.0.1.1.0.393.1269.0j6j0j1.7.0….0…1.1j2j4.64.mobile-gws-hp..0.7.1000.3..41j0i131i46k1j46i131k1.76gJ3IQOgkM
Interesting the chose “Resource” and not “Reserve” for part of their name. LOL.