Opec deal to boost shale output in US

Large-scale shale activity expected in 2019 as oil prices move up due to the deal

The decision of Opec and its allies to cut production by 1.2 million barrels per day (bpd) from January 2019 is expected to boost shale production in the US, analysts said.

The Organisation of Petroleum Exporting Countries (Opec) and its allies including Russia reached a deal on Friday to cut production by 1.2 million bpd from next year after marathon talks lasting two days in Vienna.

Oil prices went up following the deal with global benchmark, Brent going up by more than 5 per cent to trade above $63 (Dh231) per barrel and US crude West Texas Intermediate edging up by more than 4 per cent to trade at around $54 per barrel.

“The agreement has effectively given US shale producers forward guidance on finalising their capital expenditure plans for next year with some implicit guarantee of higher oil prices,” said Ehsan Khoman, head of MENA Research and Strategy at MUFG Bank Ltd in Dubai.

“Higher crude levels will increasingly assist in bolstering shale players’ balance sheets and fund renewed investments, leaving for a potential large shale supply response in 2019. The tug of war between Opec and shale is here to stay,” he added.

“The complicated issues facing Opec delayed the agreement, in what seemed like a replay of the delicate talks that led to the first Opec-non-Opec production cut agreement in December 2016,” said Ann-Louise Hittle, vice president of Macro Oils at Wood Mackenzie consultancy group. “This time, however, rather than the talks leading up to the deal being held over months, they were largely held this week.”

Tightening market

On shale production, Hittle said the Opec decision is likely to be met with support from some US producers who were concerned that without a deal, WTI prices would fall further, possibly curtailing 2019 drilling activity. “It would help producers contend with the strength of US supply growth in 2019 when we expect a year-on-year increase of 2.4 million bpd in non-Opec production as US supply continues to gain sharply.”

She said the production cut would tighten the oil market by the third quarter of 2019 and cause Brent to rise back above $70.