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OPEC expands control of oil market as shale growth stalls

After a decade of exponential growth, the US shale patch is no longer a major producer in global markets. That role is now back in the hands of OPEC and its largest and most influential members in the Middle East, analysts and industry executives say.

From oil production growth of over a million barrels per day (bpd) a year before the pandemic hit demand in 2020, the United States is now poised to see a growth rate of half that, at best, this year. Although most of the growth is coming from shale, the pace of production increases has slowed, with some analysts recently calling shale production peak as early as 2024.

A number of factors have combined in recent months to affect U.S. shale production growth — from capital discipline to labor shortages, from a lack of outside capital to cost inflation and high interest rates, from depleting prime locations to drilling to steep declines in well productivity over time.

Shale growth in the US unsatisfactory

US shale will continue to grow, even at lower rates, analysts say. But the Permian will no longer be the global momentum producer it was before 2020 when US producers plowed through all their cash and took on more debt to “drill, baby, drill” every time oil prices rose.

Last year, even $100 oil did not tempt American producers. Supply chain bottlenecks, cost inflation, labor shortages, a maturing asset base and less capital availability were the biggest drags on U.S. shale production over the past year, executives at exploration and production companies in the U.S. said. Dallas Fed Energy Survey for Q4 last month. Related: Venezuela’s vast oil fortune could become the world’s largest stranded asset

A total of 32% of R&P executives chose “cost inflation and/or supply chain bottlenecks” as the biggest burden on their firm’s production, 27% chose “a maturing asset base” and 16% cited “capital availability.” The other options each gained 9% or less.

“Geopolitical risk, economic uncertainty, material and/or labor shortages and an industry-hostile administration have made it difficult to project the next 12 to 18 months for the upstream sector,” one executive at an exploration and production company said in comments to the survey.

According to the latest EIA Short-term energy outlook (STEO), U.S. crude oil production is expected to average 11.7 million barrels per day in 2022 and average 12.4 million barrels per day in 2023, surpassing the record high set in 2019.

This may be too optimistic, some analysts and industry officials say.

US oil supply growth will be modest this year, approx 400,000 bpd equity-to-equity at the end of 2023, according to Enverus Intelligence Research (EIR).

Enverus expects global demand to grow by 1 million barrels per day this year, driven in half by the reopening of China.

“In contrast, a combination of modest US supply growth (0.4 MMbbl/d E/E), OPEC intervention and Russian sanctions are preventing a critical build-up in OECD crude, product and SPR inventories, leaving the market undersupplied if expected global economic recovery materializes in the second half of 2023,” Enverus said in a report earlier this month.

Energy Aspects analysts warned in October 2022 that US crude oil production from shale basins could peak in 2024.

“The era of aggressive growth in U.S. shale is over,” Scott Sheffield, CEO of the largest shale producer, Pioneer Natural Resources, said recently. Financial Times.

“The shale model is definitely not a swing maker anymore,” Sheffield noted.

At the Goldman Sachs Global Energy and Cleantech Conference earlier this month, Sheffield said that Pioneer cut its estimates of total Permian oil production from all operators to about 7 million bpd by 2030 from about 8 million bpd predicted a year ago. The EIA estimates that the Permian is currently pumping 5.5 million barrels per day.

Many companies are running out of inventory and moving to tier two and tier three inventory, Sheffield added.

Shale growth is likely to be around 400,000 bpd this year, down from the 500,000 bpd to 600,000 bpd that Sheffield had forecast for the past 12 to 18 months.

“And that will continue to decline over the next five years,” Pioneer’s CEO said.

OPEC is back in the driver’s seat

OPEC is now in the driver’s seat, and if oil stays around $75, the cartel is likely to act to support pricesaccording to Sheffield.

“In my opinion, they need oil to go to $100 a barrel or more.” OPEC ministers are frustrated by the recent drop in prices. Of course. I think it will change. If it stays too low, it wouldn’t surprise me if they have another cut. But they have to wait until February 5 to see a product ban on Russia,” he said at a Goldman Sachs conference.

For Jeff Curry, global head of commodities at Goldman Sachs, US shale was the place to look for spare capacity before 2020 and was able to influence oil prices when US oil production rose in the decade to 2020.

“Today that flexibility is gone, pushing us back to the ‘old oil order’ of Opec dominance,” Curry told the FT.

Author: Cvetana Paraskova for Oilprice.com

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