Opec+ gambles that US shale’s golden age is over
OIL TRADERS BELIEVE US OUTPUT WILL GROW LESS IN 2020 THAN THIS YEAR
For years, Opec ignored the rise of the US shale industry and came to regret its mistake. Now, the group is making another bold gamble on America’s oil revolution: that its golden age is over.
When the Organisation of Petroleum Exporting Countries meets this week, ministers will discuss whether to extend their current output target, rather than reduce it, according to people familiar with the internal debate. The reason? They believe relentless US oil production growth will slow rapidly next year.
Opec isn’t alone. Across the industry, oil traders and executives believe US production will grow less in 2020 than this year, and at a significantly slower rate than in 2018. On paper, the cartel has the oil market under control.
Brent crude has been trading around $60 a barrel for most of 2019, about 14% higher than at the start of the year but well below the peak of $75.60 a barrel set in late April.
“Saudi Arabia is doing a reasonable job to balance the market,” said Marco Dunand, head of commodity trading house Mercuria Energy Group Ltd. He has some words of warning too: “Opec will need to watch US production very closely.”
But Saudi Arabia and its allies should be wary of discounting competition from US shale and other non-Opec suppliers.
Total US oil production reached an all-time high of almost 17.5 million barrels a day in September, up 1.3 million barrels a day from a year earlier. That expansion is likely to continue at least into the beginning of 2020 before slowing down.
Slower growth doesn’t mean no growth, however. While the independent companies which drove America’s shale expansion are struggling, and have announced big spending cuts, Big Oil is now playing a much bigger role in key basins such as the Permian.
Vitol Group, the world’s largest independent oil trader, expects US production to increase by 700,000 barrels a day from December 2019 to December 2020, compared to growth of 1.1 million barrels a day from the end of 2018 to the end of 2019.
“For Opec, it remains a difficult first half of 2020,” Russell Hardy, Vitol’s chief executive officer, said in an interview.
The cartel knows well that it’s taking a gamble. The group’s own estimates show that if it continues pumping as much as it has done over the last couple of months — roughly 29.9 million barrels a day — it would supply about 200,000 barrels more crude daily than the market needs on average next year.
The oversupply would be concentrated in the first half, when Opec estimates it needs to pump just 29 million barrels a day to prevent oil stocks building up.