Crude war: Shale losing battle to OPEC

Amidst the dwindling crude oil price, OPEC opted at its November 27, 2014 meeting for non-interference in the market and oil prices. OPEC left the oil prices to the forces of supply and demand in its bid to “break the backbone” of US oil companies and the shale oil boom. Members of the cartel agreed to bear some losses in the short term, in order to restore their dominance once again on the world oil market in the long term.

OPEC is unlikely to blink and cut output, and the price is now approaching a level where US production will begin shutting down. Both sides are feeling the heat as oil prices tumble. OPEC members are losing out on much-needed revenue to bankroll their budgets, and many domestic energy players are feeling the pressure too.

West Texas Intermediate for February delivery rose $2.44 to settle at $48.69 a barrel on the New York Mercantile Exchange, up 33 cents for the week, the first gain since November. Brent, the international benchmark, rose $1.90 to end the day at $50.17 on the London-based ICE Futures Europe Exchange, a weekly gain of 6 cents for the front-month contract.

US rigs take the punch

US drillers have taken a record number of oil rigs out of service in the past six weeks as OPEC sustains its production, sending prices below $50 a barrel.

The oil rig count has fallen by 209 since December 5 2014, the steepest six-week decline since Baker Hughes began tracking the data in July 1987. The count was down 55 this week to 1,366. Horizontal rigs used in US shale formations that account for virtually all of the nation’s oil production growth fell by 48, the biggest single-week drop.

The Permian Basin of Texas and New Mexico, the largest U.S. oil field, lost the most rigs this week, declining by 15 to 487, Baker Hughes data show. Rigs in Texas’s Eagle Ford formation dropped 12 to 185, and the Williston Basin, home of North Dakota’s prolific Bakken formation, declined by six to 165.

Rigs drilling for natural gas in the U.S. dropped by 19 to 310. Inventories of the heating fuel in the lower 48 states totaled 2.853 trillion cubic feet last week, 11 percent above year-earlier levels.

Analysts say rig decline shows that the Organization of Petroleum Exporting Countries (OPEC) is winning its fight for market share and slowing the growth that’s propelled US production to the highest in at least three decades. OPEC’s decision not to curb its output amid increasing supplies from the US and other countries has driven global oil prices down 60 percent since June 2014.

US production yet to slow down

The slump in oil rigs has yet to stop the unprecedented growth in US oil production, which added 60,000 barrels a day in the week ended January 9 to 9.19 million, Energy Information Administration data show. That’s the most in weekly data since at least 1983. Oil companies are only stopping production at their worst wells, which only produce a few barrels a day. At current prices, those wells are not worth the lease payments on the equipment. Many U.S. frackers will keep pumping at a loss because they have debts to service: about $200 billion in total debt.

Oil price rebound could take some time, despite increasing signs that the downtrend will end, possibly in the second half of this year as North American supply growth slows according to recent IEA report.

Crude oil prices have fallen almost 60 percent over the last six months with both of the world’s crude oil benchmarks now trading below $50 a barrel as supplies of high quality, light oil from the United States and Canada have overwhelmed demand at a time of lacklustre global economic growth.

The Organization of the Petroleum Exporting Countries has not cut production despite the collapse in prices.

The IEA, which coordinates energy policies of industrialised nations, said lower prices would eventually start to curb output and boost demand.

“The most tangible price effects are on the supply front. Upstream spending plans have been the first casualty of the market’s rout. Companies have been taking an axe to their budgets, postponing or cancelling new projects, while trying to squeeze the most out of producing fields,” it said.

The agency cut its outlook for 2015 non-OPEC supply growth by 350,000 barrels per day (bpd) to 950,000 bpd, down from record growth of 1.9 million bpd in 2014.

The IEA cut its output growth forecasts for Canada and the United States by 95,000 bpd and 80,000 bpd respectively as well as for Colombia by 175,000 bpd and by 30,000 bpd for Russia.

It said oil supply growth wasn’t slowing more quickly in North America because many producers appeared to be well hedged against short-term price drops.

Downward revisions for non-OPEC supply growth mean demand for OPEC oil will average 29.8 million bpd in the second half of 2015 – just shy of OPEC’s official target of 30 million bpd.

For the whole of 2015, the IEA raised its estimate of the demand for OPEC crude by 300,000 bpd to 29.2 million bpd – still far below the group’s December output of 30.48 million. OPEC’s output in December was boosted by Iraqi supply, which surged to 35-year highs while Saudi supplies remained stable.

On the demand side, the IEA said signs of a response remained elusive: “With a few notable exceptions such as the United States, lower prices do not appear to be stimulating demand just yet.”

That was because the usual benefits of lower prices – increased household disposable income, reduced industry input costs – have been largely offset by weak underlying economic conditions, which have themselves been a major reason for the price drop in the first place, the IEA said.

The net result of these changes is that implied stock builds are set to continue through the first half of this year, the IEA said, adding that some rebalancing may occur in the second half.

“Rebalancing of the market does not equate to a return to the status quo ante. It is clear that the market is undergoing a historic shift.”

“While there might be light at the end of the tunnel for producers as far as prices are concerned, the next few years could nevertheless prove a period of reckoning for a market and an industry that, through the course of their 150-year history, have had to periodically reinvent themselves.”

FRANK UZUEGBUNAM