The price of oil dropped last week from recent highs. One of the alleged culprits is purported to be the increased production by American shale producers. Did this actually cause the price declines?
Though data for the month of January is not yet available, there is a widely held belief that shale production will rise – if it has not already – based on a reaction to higher prices from OPEC’s agreement. Harold Hamm, CEO of Continental Resources, told Bloomberg that:
“There’s a real concern by industry that we could be in for another one of these price adjustments, if we get carried away with development.”
Fatih Birol, of the IEA, told Reuters Television in Dubai:
“I expect the U.S. shale oil will go back to increasing production this year.”
Thus, the question is if increasing shale production is really pushing oil prices down right now.
Projections indicate a potential oversupply of shale again in 2017. Amos Hochstein, the Special Envoy and Coordinator for International Energy Affairs at the U.S. State Department, told Gulf News:
“As a result of OPEC action, prices rose by a few dollars and as a result you’ve seen shale oil production going up again in the United States. We had hit a low of 8.4 million barrels a day of the total production, we are now back up to 8.7 million barrels a day.”
Traders foresee increased U.S. production compensating for cuts from OPEC and its partner non-OPEC countries. However, traders have different opinions about the level of expected compensation, and thus they are making and preparing different bets. Some see increased U.S. production nearly matching the decrease from OPEC/non-OPEC, while others see a less robust compensation.
It is unlikely that increased U.S. production will entirely cancel out the planned OPEC/non-OPEC production cut, but if U.S. production reaches the EIA’s projected 9.3 million bpd number it will provide some measure of compensation. On the other hand, based on experience, most watchers doubt that OPEC and its partners will truly cut the intended average of 1.75 million bpd over the six-month agreement period. Therefore, it is possible that U.S. production could fully compensate for OPEC/non-OPEC cuts at a more reasonable production rate.
Sophisticated traders will be looking at the balance between OPEC/non-OPEC cuts and increased production from the U.S. and similarly situated producers, such as Canada. That is where the global production levels will be judged between now and late spring.
The first major event to watch will be the OPEC compliance meeting scheduled for Sunday, January 22 in Vienna. It is very likely OPEC will say that all is on schedule with the production cut agreement.
First, the cut requirements are for an average daily production rate over 6 months, so there is leeway for countries to adjust production at this point in the agreement. Second, OPEC would not want to admit failure this early, so the messages coming out of the meeting will almost certainly be positive. Third, when countries have cheated slightly in the past, the major players (specifically Saudi Arabia) have often compensated slightly with additional cuts.
How do you think the production balance will shift over the next six months and how will it impact prices? Add your thoughts below.