U. S shale producers increased production: What should OPEC do?

While concerns keep rising about how new U.S. sanctions against Iran could be extended to affect crude and fuel supplies, rising U.S. production have kept undermining efforts by the Organisation for Petroleum Exporting Countries, OPEC and other producers to end global oil oversupply.

This is because 17 oil rigs were added in the U.S. in the week to Feb. 3, bringing the total up to 583, the most since October 2015.

According to the Energy Information Administration, EIA, oil output will average 9.53 million barrels a day in 2018, up from 9.3 million projected in January. Production averaged 8.94 million a day last month.

The Administration also expected, that around 6 percent of Chinese refining capacity would shut down at some point during the first half of the year, equivalent to around 900,000 bpd of capacity. A 6.7-percent reduction to 68.81 million tonnes between 2016 and 2017 crude import quotas for China’s independent refiners will weigh on the overall import demand.

As a result, money managers reduced their bets on rising West Texas Intermediate prices for the first time in a month. While the group and other major exporters are pumping less crude, U.S. inventories and production are on the rise, and shale drillers keep adding rigs. The U.S. benchmark has traded mostly between $50 and $55 a barrel for the last three months.

According to data, U.S. producers extension of oil rigs is the highest in more than four years as shale plays of Texas and Oklahoma lure investment from Exxon Mobil Corp. and Continental Resources Inc.
U.S. crude output climbed to 8.98 million barrels a day in the week ended Feb. 3, according to the Energy Information Administration.

That is an increase of about half a million barrels a day from last year’s low, and the agency expects production to keep climbing to reach 9.53 million a day next year, the most since 1970.

On the other hand,in other to boost price and reduce market glut, according to Platts, 10 OPEC countries have achieved a 91 percent compliance rate with the targeted cuts.

OPEC pumped 32.3 million barrels a day last month. Platts is one of the sources used in OPEC’s official secondary sources survey in its monthly oil market reports.

Saudi Arabia, OPEC’s largest producer, led the January cuts with a reduction of half a million barrels a day, going below 10 million.

United Arab Emirates and Kuwait followed by cutting a combined 310,000 barrels a day.

Iraq’s production declined by 120,000 barrels a day to 4.51 million.

Russia, the largest of the non-members, curbed production by 117,000 barrels a day last month. Russia pledged to gradually reduce supply by as much as 300,000 barrels a day, more than half the total non-OPEC pledge for a 558,000-barrel-a-day reduction.

However, despite the frantic efforts by OPEC and Russia to boost price, price keeps hovering around $50 and $55 per barrel, no thanks to shale production boost which keeps crashing prices.

U.S takes over OPEC’s market share

If care is not taken, OPEC and Russia will lose what they have worked hard for – cutting oil oversupply to boost price.

Data gathered by Business Times showed that the United States, U.S., exported a record amount of crude oil, topping a million barrels a day for a second week and filling the gap in world markets created by OPEC cuts.

Records show that shale and other U.S. producers sent into the market, 1.2 million barrels of crude oil two weeks ago.

By calculation, this means U.S market share is now up nearly 200,000 barrels a day from the week earlier and about 350,000 barrels above the four-week average, according to Energy Information Administration data. Until recently, the U.S. was exporting about 500,000 barrels a day.

“OPEC’s got a competitor. No doubt about it,” said Kyle Cooper, a consultant with Ion Energy Group.

“They certainly have to be concerned with U.S. oil producers eating into their market share.”

U.S. producers have also increased production to 9 million barrels a day last week, a level last seen in April 2016.

According to EIA, oil supplies grew for a seventh week, adding a smaller than expected 564,000 barrels.
“OPEC is definitely looking over its shoulder at these rising numbers of exports, and it’s undermining their efforts on a daily basis,” said John Kilduff of Again Capital. “Some of it’s going to Asia. China is one of the more unusual buyers in there.

The shale guys are filling the gap of the very cuts that were put in place by the market.”

OPEC and non-OPEC producers, like Russia, recently agreed to cut about 1.8 million barrels a day.

Before the cut deal, OPEC decided to flood the market in reaction to the rise of U.S. shale production in the last decade.

As a result, oil crashed to $20s.

While OPEC has achieved 90 percent compliance, non-OPEC 70 percent. OPEC removed about 890,000 barrels a day from the world market in January.

Fresh oil shipping data, revealed that traders from North America, Britain and Brazil have tripled their shipments to Asia, taking advantage of the OPEC cuts. Research shows that about 30 super tankers last month made their way to Asia from the Americas, the North Sea and Mediterranean.

“The pressure on prices is going to stay in place and ultimately break us out of this range to the downside,” said Kilduff. “I’m not sure the Saudis don’t throw it down … but history says the shale guys will cut back.”

Biggest oil players catching up

Meanwhile, biggest oil players, the United Arab Emirates and Iraq, have promised to catch up quickly with their promised targets.

UAE will try to move closer to its OPEC target in coming months, improving average compliance during the six-month duration of the supply cut rather than focusing on month-by-month performance.

“The UAE is fully committed to the OPEC cuts and is undertaking the necessary measures that will ensure it is fully compliant over the six-month period with the OPEC agreement,” the UAE’s OPEC governor, Ahmed Al Kaabi, said in a statement.

The UAE, among the core Gulf OPEC group that traditionally shows high compliance with output agreements, has focused on expanding its production capacity in the last few years, rather than on limiting output.

It doubled the capacity of its Ruwais refinery last year to more than 800,000 barrels per day to feed rising domestic demand.

Oilfield maintenance could also help to push compliance higher. Abu Dhabi National Oil Co has work planned at fields producing Murban and Das light crude in March and May, people familiar with the matter said.

Top exporter Saudi Arabia cuts production by even more than called for in the OPEC deal, helping to push compliance higher, according to its own figures and those of independent analysts.

The UAE and Iraq’s own figures suggest they have further to go than other big OPEC producers to reach targeted output.

According to data the countries reported to OPEC, while both cut production substantially in January, they did so from higher levels than the supply baselines used in the agreement, meaning that technically they are not complying at all.

Iraq had initially been reluctant to limit supply. In negotiations last year on the supply cut, Iraq argued that it should be exempt due to a need for cash to fight Islamic State militants.

Baghdad also pushed to be allowed to cut production from a higher level than estimated by the secondary sources OPEC uses to monitor its output. Eventually, to get a deal, it accepted a cut from a lower baseline.

Iraq’s OPEC peers are privately urging Baghdad to make further reductions, sources say, and there are indications compliance may at least not worsen. Partial export figures for February suggest no increase in shipments, and March allocations were reduced sharply.

“Iraq’s allocations in March are low due to OPEC cuts, mainly,” a source familiar with the matter said. “Iraq respects its commitment.”

Nigeria, others on oil production rise
In line with OPEC’s agreement not to cut production, Nigeria ramped up its oil output by 9.3 percent, making 1.64 million barrels a day, according to data compiled by Daily Times.

OPEC members not required to cut, added a total of 270,000 barrels a day in January.

Libya increased production to 690,000 barrels a day, the highest level in more than two years.

Iran, which was allowed to continue restoring output to pre-sanctions levels, pumped 3.8 million barrels a day, the most since 2010.

Nigeria’s increase in production comes on the heels of announcement that OPEC had reduced output by 91 percent.

What should OPEC do?
Now that Shale producers are beginning to eat into OPEC’s market share, attracting more investment and snatching buyers from OPEC, the Cartel’s Secretary General, Mohammed Barkindo, last week, advised OPEC countries to reduce costs of production in order to attract new investments just like the Shale producers.

However, he himself agreed that oil prices fell to historic lows as the market struggled with continued oversupply, saying the U. S shale producers now benefit from OPEC’s cut deal.

“More than any other group of producers, [U.S. shale] have been impacted negatively by this adverse cycle, and they therefore tend to benefit the most from the actions taken by the 24 producing countries,” Barkindo said.

Aside reduction of production costs by OPEC, a school of thought has argued that since U. S has decided to flood the market with cheaper products, gradually taking over OPEC’s market share, it will be a 50/50 game for OPEC to respond in like manner. This means OPEC should do away with the cut deal, lower costs, crash budget and flood the market with products, further chasing Shale oils back to the background.

However Barkindo played down speculation that the surge is sabotaging the cartel’s closely watched agreement to cut oil production, analysts have argued that rise in cost of production in OPEC slows down investment.

Speaking, Barkindo said he’s looking to start an “energy dialogue” with the U.S., rather than fret over the rise in supply from American oil producers.

“We are not looking at the U.S. as a risk, we are looking at the U.S. as a partner — a strategic partner in the rebalancing process,” he said.