Monday, May 15, 2017

U.S. Shale Oil Boom Is Actually ‘OPEC’s Friend’

Shale and OPEC together are taking on other oil producers, GS analyst says.


By Sara Sjolin
MarketWatch
May 15, 2017

From foes to friends?

U.S. shale oil producers have largely been portrayed as the nemesis of the Organization of the Petroleum Exporting Countries, but the cartel should actually be welcoming the ramp-up in production stateside, according to Goldman Sachs’s top commodities analyst.

After the initial slump in production following the 2014 oil crash, U.S. producers have slimmed down and are now competitive at prices in some cases below $30 a barrel. That’s lower than for many other oil producers, putting the U.S. and OPEC in a joint sweet spot to squeeze out other competitors in the current oil-price environment, said Jeffrey Currie, global head of commodities research at the firm.

“There’s a lot of talk out there that OPEC is out to get shale—that it’s the battle between shale and OPEC, with OPEC sitting at the bottom of the cost curve,” he said at the S&P Global Platts Crude Oil Summit in London last week. “It’s not true. Shale and OPEC are taking on the international oil [producers] that are sitting at the top [of the cost curve]. And the international oils have to get themselves in line with the rest of that cost base.”

Crude CLM7, +2.36% is currently trading around $49 a barrel, while Brent LCON7, +2.36% trades around $52.

U.S. oil production is up sharply in 2017, incentivized by higher oil prices after more than 20 OPEC and non-OPEC members in November last year agreed to collectively cut output in a bid to balance the oil market. That’s allowed U.S. producers to increase market share, while at the same time benefiting from the rise in prices.

With demand also surprising to the downside, U.S. oil inventories touched a record high earlier in 2017, helping to send prices below the levels seen before the OPEC deal in November.

That’s led to speculation OPEC could start defending its market share again to squeeze the U.S. producers. However, Currie said that’s the wrong way to look at it. In what he calls “The New Oil Order,” shale oil has emerged as the new dominant technology in the oil market, which gives it certain advantages.

“Once you have the dominant technology, you exploit. And that’s essentially where we are,” Currie said.

That means “shale is OPEC’s friend. It’s really only scalable around $50-$55 a barrel, which means [OPEC producers] have a lot of room in which they can grow production underneath that level,” he added.

Many OPEC producers have significantly lower production costs, so a steady oil price around $55 is still enough to generate generous profits for those countries. Goldman sees crude oil around $55 at the end of 2017 and Brent at $57.

What’s more, there are signs that demand has finally started to outstrip supply, which means inventories will quickly start to shrink. The U.S. Energy Information Administration on Wednesday, for example, said domestic crude supplies dropped by 5.2 million barrels last week, a much bigger drawdown than expected.

“Do I want to be long oil? The answer is absolutely yes, because we are going into a deficit market,” Currie said, adding that the supply shortage could be as much as 2 million barrels a day in July.

“This market is going into a deficit, with or without OPEC and all OPEC did was to pull forward something that was already going to happen,” he added.

Even so, Neil Atkinson, head of oil analysis at the International Energy Agency, said the supply deficit is likely to widen if OPEC extends its output accord at its closely watched meeting on May 25. Several cartel members—including OPEC kingpin Saudi Arabia—have already signaled that they are ready to extend to production quotas for at least another six months.

“If you were to take the IEA’s oil report and look at estimates of what OPEC might do—it might rollover the existing levels—and assume no changes to the demand and supply outlook, you will find that as we move to the second half of the year it is likely that the surplus in demand and supply will grow,” he said at the oil conference in London.


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