US shale producers bullish ahead of OPEC+ meeting
In the run up to the OPEC+ March meeting, one of America’s largest shale oil producers has claimed that shale oil is no longer a threat to OPEC. It was a bullish and uncanny statement given that the coronavirus disease (COVID-19) pandemic has ruined any market competitiveness amid an uncertain oil demand recovery.
Diminishing competition from shale oil barrels was justified on the basis of strong upcoming demand and shale's low growth rates, meaning OPEC producers need not worry about competing for market share with the US shale oil industry.
The statement is a direct message encouraging OPEC to ease output cuts, amid the declining influence of shale oil on the market. However, shale oil was never a threat to OPEC producers. Conversely, it was needed to meet global oil supply needs before the COVID-19 outbreak impacted oil demand.
More interestingly, however, this bullish signal could be more damaging to the shale oil industry if OPEC+ fails to read the market and act with caution causing prices to take a steep downward movement.
Shale oil was never a threat to OPEC, if anything, shale producers always benefited from OPEC’s effective market management.
Current oil prices are hovering around the $60 per barrel mark, which should help shale oil to revive. If OPEC+ starts to ease output cuts before oil demand recovers to pre-pandemic levels, this will push oil prices down, which will be much more damaging to shale oil producers than OPEC producers.
It is important to understand what is going on in the shale producers’ ecosystem. Their latest move is akin to using a pistol to kill mosquito and raises big concerns about the survival of the shale industry.
Shale oil was never a threat to OPEC, if anything, shale producers always benefited from OPEC’s effective market management, including in April when the US asked Saudi Arabia to help stabilize the global oil market.
It is obvious that American oil output will not return to pre-pandemic levels soon. One year ago, US crude oil production historically peaked at 13.1 million barrels per day (bpd), while the latest production report by the US Energy Information Administration put the figure at below 10 million bpd.
Hence, a subdued shale rebound is widely expected. Even as crude prices rise, and despite the fact that shale producers have added more rigs in recent weeks, there is still uncertainty surrounding oil demand recovery.
Therefore, the huge pressures from investors to reduce debt has kept shale oil producers from rushing to complete new wells.
- Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq