Shale’s recovery may stall oil rally
U.S. producers offsetting OPEC’s effort to drain glut
Higher prices and increased drilling have returned mud-flecked roustabouts to Texas oil patches, lifting spirits and fattening profits across the state’s vast petroleum complex.
But analysts and executives warn the oil industry may again become the victim of its own success if a second surge of domestic crude production this year counteracts OPEC’s efforts to drain the world’s oil glut. The Energy Department projects that U.S. oil producers could put out an additional 630,000 barrels a day by the end of the year — about half OPEC’s output reductions — and lead an increase among non-OPEC producers that’s expected offset all the production cuts adopted by the Organization of the Petroleum Exporting Countries.
The shale recovery could weaken oil prices over time or keep them from rising much higher,
analysts said, a grim prospect for Houston’s energy industry, with has begun to rebound after shedding thousands of jobs during the two year oil bust. For OPEC, it means the main lever to manage the markets — oil production cuts — has become less effective because of shale producers’ ability to respond quickly to higher prices.
“OPEC is clearing the way for U.S. shale producers to take their market share,” said Jim Krane, a fellow for energy studies at Rice University’s Baker Institute. “It’s a new paradigm they’re trying to grapple with.”
After rising steadily after OPEC last fall announced its plan to cut output, oil prices have stalled near $50 a barrel. In recent weeks, they slid below the $50 mark on concerns about increased U.S. production, but regained that level last week. Oil settled at $50.60 Friday in New York. Texas output hits high
Ironically, preventing a quick comeback in the U.S. shale industry was one reason OPEC kept its output near record levels during the two-year oil bust, hoping low oil prices would eviscerate highercost producers like shale drillers.
But early signals indicate the shale oil industry, which has found ways to make money at lower prices, is making a stronger return than analysts had expected.
The nation’s fleet of active drilling rigs has more than doubled since last summer. In January, daily U.S. oil production increased by 60,000 barrels to 8.84 million barrels and Texas output jumped to its highest level since last April, the Energy Department said Friday. If the trend continues, U.S. producers could put out nearly 10 million barrels by the end of 2018, just shy of the nation’s all-time record in 1970, the Energy Department said.
Since September, when OPEC first began talks about curbing oil production to support prices, countries outside the OPEC — led by the United States, Canada and Brazil — have produced an extra barrel of oil for each barrel OPEC has tried to keep off the market, increasing by 1.2 million barrels a day. OPEC has cut the same amount since January, according to the consultancy IHS Energy.
“It’s really stunning that the OPEC cuts have been entirely offset,” said Jim Burkhard, head of oil market research at IHS Energy.
Next month, OPEC will begin delicate negotiations over whether it will extend its oil production cuts beyond summer — a decision likely to be complicated by forces increasingly beyond its control. Even with OPEC’s production cuts this year, French bank Société Générale believes global oil production this year will climb 400,000 barrels a day higher than last year’s annualized average.
Nowhere in the world is that playing out more than in the Permian Basin in West Texas and New Mexico, which has accounted for three-fourths of production growth in U.S. shale basins, the Energy Department said.
But for U.S. producers, the recovery has been dearly bought.
Avi Mirman, chief executive of San Antonio’s Lilis Energy, said his company cut the bulk of its workforce during the downturn, and for four months, he and his fellow executives went without a paycheck.
But now, as oil prices have risen and the company has found ways to produce oil at lower costs, the company has hired 40 workers and plans to drill a dozen wells in the Permian Basin this year, and double that next year.
“Lower prices backfired on OPEC,” Mirman said. “The assets that were in the hands of the weak are now in the hands of the strong. They’re not going to be able to smoke U.S. producers out.” Market favors growth
Analysts said U.S. oil companies are responding to stock market investors, who want them to get out of survival mode and start growing again. For two years, shareholders rewarded companies for curbing costs and paying down high levels of debt. Now, Wall Street favors big growth plans.
“The pendulum has started to shift the other way, in a measured way,” said Michael Wittner, an oil market analyst at Société Générale. “But we’ve been through a hell of a cycle.”
Companies in the Permian Basin have raised more money from the stock market and their share prices have climbed higher than companies operating in the Eagle Ford Shale and the Bakken Shale, analysts say.
Together, five firms operating in the Permian Basin — Pioneer Natural Resources, Parsley Energy, Diamondback Energy, RSP Permian and Concho Resources — have raised nearly $7 billion from investors in the past year by selling more stock in so-called follow-on offerings. They plan to spend a combined $7.3 billion on raising oil production rates by 18 percent to 80 percent compared to last year.
But at the same time, they’re not leaving their fortunes to chance. Pioneer and Parsley, for example, have locked in higher oil prices for 80 percent of their coming production this year through a trading technique known as oil hedging. That means these producers will sell oil above $50 a barrel oil even if the barrels of crude they put out weigh on prices later this year.
Some analysts believe U.S. oil production could rise even higher than the Energy Department has forecast.
“U.S. oil producers are known to beat expectations,” said Warren Russell, a commodities research analyst at British bank Barclays. “We’re still figuring out the true limitations of shale oil.”