OPEC coalition cuts unlikely to affect US shale output: analysts
Saudi Arabia’s energy minister Khalid Al-Falih said that US oil and natural gas producers were “breathing a sigh of relief” over the planned production cut announced Friday, but analysts expect that the agreement will have little impact on US shale output.
“I just think there’s a lot of uncertainty and this is a pretty small cut,” Amy Myers Jaffe, director of the Council on Foreign Relations’ energy security and climate program, told S&P Global Platts Friday.
“I believe there will be little change in US production as a result of the announced cuts,” said Rene Santos, an analyst with Platts Analytics.
Growth of US shale production, the only domestic output which can react relatively fast to price changes, may be capped because of takeaway constraints in the Permian unlikely to be relieved until late 2019, Santos said.
In addition, there are too many questions about the agreement, particularly compliance and duration, to significantly boost US oil output, he added.
The agreement by OPEC and its allies, led by Russia, to cut 1.2 million b/d in oil output starting January may be a relative non-factor for US producers, who are basing their output decisions more on pessimism about the stock market, the looming US-China trade dispute and an ongoing currency crisis in emerging markets, Myers Jaffe said.
“The OPEC cut is only going to gain momentum if the negative aspects of those other features do not assert themselves,” she said. “I don’t think OPEC has the will to make the kind of cuts we’d need to make if we saw a real recession.”
But Jason Bordoff, a former energy policy adviser to Barack Obama and founding director of Columbia University’s Center on Global Energy Policy, said the 1.2 million b/d production cut will likely keep oil prices within the current range and prevent a dramatic decline.
“The outlook for US shale production is much brighter, with oil prices in the $60s than the $50s or below, so today’s decision to prop up the price will help shale output continue to grow, even if not as rapidly as the dramatic surge seen in 2018,” Bordoff said.
ICE February Brent was trading just below $62/b Friday afternoon, up about $1.90 from Thursday’s settlement. The contract traded as high as $63.73/b Friday morning on news of the OPEC coalition’s cut agreement.
The decision by OPEC, Russia and other allies to cut production comes as US oil production continues to shatter all-time records.
US oil production averaged nearly 11.6 million b/d in November, a roughly 1.5 million b/d increase from November 2017, according to estimates by the US Energy Information Administration. EIA expects US oil output to exceed 12 million b/d by April, a nearly 3 million b/d increase in just two years.
The increase is largely being fueled by growth in the Permian, where output is expected to average nearly 3.7 million b/d in December, according to the EIA.
On Thursday, the US Geological Survey released an assessment that claimed the Wolfcamp shale and Bone Spring formation, two of the Permian Basin’s fastest growing oil and natural gas plays, have an estimated mean of 46.3 billion barrels of oil and 281 Tcf of gas.