OPEC sees victory in war against shale

OPEC says the demand for its oil will rise during 2015 because the cartel is winning its price war against US shale producers by driving them out of business.

According to its monthly market report released on April 16, the oil cartel said “higher global refinery runs, driven by increased seasonal demand, along with the improvement in refinery margins, are likely to increase demand for crude oil over the coming months”.

OPEC forecasts demand at an average of 29.27 million barrels per day in the first quarter 2015, a rise of 80,000 bpd from its previous prediction made in its March report. At the same time, it said, the cartel’s own total output will increase by only 680,000 barrels per day, less than the previous expectation of 850,000 barrels per day, due to lower US and other non-OPEC production.

The United States appears to have been OPEC’s chief target when, at its November 2014 meeting in Vienna, its members, under Saudi leadership, agreed to maintain production at 30 million barrels per day despite falling prices caused by an oversupply of oil.

Average global oil prices began plunging in late June 2014 from more than $110 per barrel to a low of around $50 in January and at present settling around $60. Analysts believe that the price of a barrel of oil probably would go no lower than $60 this year, but also rise no higher than $80.

The initial oversupply came mostly from a boom in US shale production, which was turning Americans from OPEC’s biggest customer into a competitor. But shale oil extraction requires hydraulic fracturing, or fracking, which is more expensive than conventional drilling and is not profitable if the price of oil falls below a threshold of about $60 per barrel.

The US producers are beginning to feel that price pinch, the OPEC report said, quoting data gathered by Baker Hughes, the large US oilfield services company, that the oil rig count in the United States fell by 238 in March, leaving a total of only 1,110 rigs operating in the country as of March 15. It also pointed to a declining number of drilling permits.

As a result, OPEC said, it expects that US supplies of oil will increase to around 13.65 million barrels a day in this year’s second quarter, but then flatten and begin to turn down for the rest of the 2015. This applies to Canadian production as well. “US tight oil and Canadian oil sands output are expected to see lower growth following the recent strong declines in rig counts,” the report said.

On other subjects, OPEC produced 30.79 million barrels of oil per day in March, 800,000 more barrels than in February, the report said, citing not its own members but independent sources including industry sources, oil analysts and shippers. It said this increase can be attributed to Saudi Arabia, which increased its output, as well as strong production in Iraq and increased production in war-torn Libya.

As for global demand for OPEC’s own crude oil, the report said it would rise only marginally to an average level of about 29.3 million barrels a day this year. “Almost two thirds of 2015 oil demand growth is seen coming from China, Other Asia [Indonesia, Malaysia, the Philippines and Thailand] and the Middle East,” the report said.

Meanwhile, it said, worldwide demand for non-OPEC oil is expected to drop by about 165,000 barrels per day to 680,000 barrels per day.

IEA says shale boom shows signs of slowing

The US shale boom shows signs of slowing just as Saudi Arabia pumped close to a record amount of crude oil last month, leading the biggest surge in OPEC output in almost four years, the International Energy Agency (IEA) said.

OPEC may extend its biggest output gain since June 2011 into next month as recovery in Libya and Iraq adds to the Saudi increase, the IEA said. Average US oil production of 12.6 million barrels a day in the first six months of 2015 will slide to 12.5 million by the fourth quarter as companies curb drilling, the agency said.

Oil prices are about 45 percent lower than a year ago as OPEC keeps output elevated in response to booming shale production and rising Russian supplies. While the US will still pump an extra 710,000 barrels a day of oil this year, unprecedented reductions in drilling mean growth will be about 25 percent lower than the IEA projected in November, before OPEC embarked on its policy to defend market share.

The IEA cut estimates for North American oil production in the second half by 160,000 barrels a day. “Decreases in drilling rates and backlog of uncompleted wells point to slower production growth than previously expected,” the agency said.

Drillers in the US have cut the number of rigs in service to the lowest since 2010, according to Baker Hughes Inc. The nation’s oil production will increase to an average of 12.52 million barrels a day in 2015 from 11.81 million last year, according to the IEA.

FRANK UZUEGBUNAM