U.S. rolls with OPEC blow as Brazil, Canada take hits

‘Non- shale, non- OPEC is going to struggle,’ Standard Chartered says

LONDON Eight months into OPEC’s plan to hit rival oil producers, the casualties are mounting. Surprisingly, the most resilient may be the one that triggered the fight: the United States.

Projections for combined daily output from Brazil, Canada, Russia, Mexico and Colombia by the end of the decade were cut by 2.8 million barrels since oil slumped last year, data from the countries and the International Energy Agency show. In contrast, the U.S. Energy Department increased its estimate for crude output in 2020 by more than a million barrels.

Prices fell more than 45 per cent in the past year after the Organization of Petroleum Exporting Countries refused to cut output, instead pressuring rival producers to eliminate a global supply glut. While the number of active U.S. oil rigs has halved, production remains close to a three-decade high and is forecast to keep growing after a pause in the coming year. Projects elsewhere will suffer more, according to Standard Chartered PLC and BNP Paribas SA.

“Some have misinterpreted OPEC’s strategy as targeting U.S. shale oil production,” said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas in London. “But any attempt at shutting down U.S. shale oil will prove futile. Rather, OPEC has aimed at crowding out investment in higher-cost and less-efficient conventional basins.”

Brent crude futures, a global benchmark, closed Friday at $57.10 US a barrel on the London-based ICE Futures Europe exchange. The market remains “massively oversupplied,” the IEA said July 10.

While U.S. drillers are in retreat, their flexibility and declining costs will help them endure, according to Torbjoern Kjus, an analyst at DNB in Oslo.

U.S. shale-oil output will slide by 91,000 barrels a day in August, the biggest monthly pullback since the start of the boom in 2007, the Energy Information Administration said this week. That follows a 61-per-cent drop in the number of active drilling rigs between December and June, Baker Hughes Inc. data show.

“U.S. production has flattened out and stopped growing,” Mike Wittner, head of oil market research at Societe Generale in New York, said by email Thursday. “Shale is decreasing. You ignore that at your peril.”

While the expansion in U.S. shale output is set to halt over the next 12 months, the nation’s total oil production will keep growing thanks to offshore fields and liquids extracted from natural gas, according to the IEA. The shale industry is making “steep cost-reductions” and growth will resume by the middle of 2016, the agency says.

Average U.S. crude output for this year will still climb to a 45-year high of 9.47 million barrels a day, according to the EIA. In April, the agency raised its 2020 crude-output forecast to 10.6 million barrels a day from 9.55 million previously, citing better technology and the ability of explorers to move to the most-prolific oilfield “sweet spots.”

Brazil and Canada are among those “most in the firing line” at current prices, Paul Horsnell, the head of commodities research at Standard Chartered in London, said July 13. Brazil’s so-called presalt offshore fields, and Canada’s oilsands are “frontier” oil provinces where costs are higher because of their technical complexity or remoteness, he said.

Petroleo Brasileiro cut its 2020 production target by 1.4 million barrels a day to 2.8 million, reducing planned capital expenditures through 2019 by a third, the Rio de Janeiro-based company said June 29. The Canadian Association of Petroleum Producers reduced its 2020 oil production forecast by 270,000 barrels a day to 4.64 million on June 9.

The IEA pared its 2019 production estimates for a range of non- OPEC nations on Feb. 10. Its forecast for Russia was cut by 5.4 per cent to 10.45 million barrels a day while Mexican output was projected at 2.67 million, 8.9-per-cent lower than previously.

“U.S. production is going to continue to tick up over the next few years,” said Standard Chartered’s Horsnell. “Non- shale, non- OPEC is going to struggle.”