Shale Haunts OPEC | Russell T. Rudy Energy LLC
OPEC, like all oil producers, is enjoying the recent run-up in prices as a result of their plans to cutback production in concert with Russia. However, an article in “Rigzone” addresses the obvious question: How will U. S. shale operators react?
In 2014, the shale revolution resulted in new production hitting crude markets and exerting downward pressure on oil prices. OPEC’s decision to produce as much as possible in order to drive shale producers out of business only made matters worse. By 2016, the global oil glut had driven prices down to one fourth of pre-shale levels. Consequently, OPEC’s oil revenues dropped by approximately 50% over the same period. Even Saudi Arabia has had to cut public sector employee wages and turn to the bond market for funds to address its budget deficit.
The International Monetary Fund (IMF) now estimates even $58 dollar oil will not eliminate the cash shortages of eight OPEC nations. In fact, the IMF thinks this would require a price of at least $62 per barrel. If one accepts this analysis, OPEC had little choice but to cut back production and seek Russia’s cooperation in doing so. However, the long term success of this strategy is not guaranteed.
One concern is that OPEC tends to cheat on production quotas. When prices start to recover, member states apparently cannot resist increasing production in order to maximize revenues. Predictably, this just adds to supply which, in turn, forces prices back down.
Another issue is the reliability of Russia as an ally. While the nation has promised to cut production by 300,000 bopd, their track record on complying with production quotas is mixed at best.
Libya and Nigeria present another problem. Due to political turmoil in these two nations, the new cutback accord exempted them from production limits. Should their domestic situations improve and production increase, this could put downward pressure on prices.
However, the biggest threat to sustained price recovery is probably the U. S. shale industry. Domestic operators are already producing 8.8 million bopd, 4.5 million of which is shale. Current production is about half of 2014 levels and this is being achieved with about a third of the rigs deployed back then. Citigroup contends that a $10 price improvement would quickly result in a 500,000 bopd increase in output. A larger price increase could lead to production surging by 1 million bopd according to Macquarie Research. This would basically offset the planned OPEC production cuts.
Some domestic shale operators have taken advantage of recent price increases and hedged future production in order to insure the financial stability and flexibility necessary to support future growth should it prove economically advantageous.
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/147904/Shale .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
