"Something potentially seismic" happened last week, says Jeremy Warner in The Sunday Telegraph. Oil prices slumped sharply. US WTI futures lost 7% and tumbled through the $50-a-barrel mark. Brent crude, the other key benchmark, has also slipped to a four-month low. Bullish speculators had piled into oil futures, so when the trend changed they all rushed for the exit, exacerbating the downdraft. But the underlying problem is that the glut everyone thought would be shrinking by now just isn't. "There is little to suggest as yet that market tightening has begun," as Commerzbank puts it.
Prices bounced in late November because the oil exporters' cartel Opec and some non-members, notably Russia, agreed a plan to cut oil output. However, US production, some of which Opec had hoped to cut permanently when it flooded the market in 2014 to drive US shale producers out of business, has bounced back rapidly. Last week US stockpiles reached a new record.
US shale drillers have become far more efficient and economical, so even a mild uptick in prices to the $50-$60 range has spurred a sharp jump in US production. The number of rigs drilling the horizontal wells used for shale output has more than doubled from 248 to 513, according to Ed Crooks and Gregory Meyer in the Financial Times. Production in the US has risen by 600,000 barrels a day since last summer. What's more, the output reduction deal, designed to cut 1.8 million barrels a day, has hit a speed bump or two, says Irwin Stelzer in The Sunday Times. The non-members, including Russia, have only managed to push through two-thirds of their mandated cuts. Saudi Arabia has had to double the cuts it agreed to make in order to boost the organisation's compliance rate to 94%.
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Iran is using the relaxation of sanctions to regain market share, while Iraq increasingly under its neighbour's thumb is bosting its production capacity by 500,000 barrels a day. Nor can the Saudis count on shale producers agreeing to curb output, adds Stelzer. Competition laws forbid such collusion. They will keep pumping until sliding prices prompt them to curb output.
In the meantime, it appears that US shale producers can now temper and cap any price rise produced by Opec, and depending on the strength of global demand, may be able to keep prices in a range around current levels. That's good news for the world's consumers, but for Opec, the notion that America will be a major source of oil for the global economy for years to come will take some getting used to.
The US can now rival Saudi Arabia in the oil stakes
Over the past two decades, oil extraction technology has vastly improved, facilitating output from areas and deposits once thought irrecoverable. The ability to produce oil from deposits in rock, or shale oil, has been a key part of the story.
US oil production soared from just over four million barrels per day (mbpd) to more than 9.5mbpd in early 2015. The plunge in oil prices caused by Opec turning on the taps to squeeze out new US producers reduced output to 8.6mbpd, but it is now heading back to around 9mbpd.
The Permian Basin, a huge field straddling western Texas and southeastern New Mexico, has produced 70% of the new oil that has come on stream in America since 2015, says Irwin Stelzer in The Sunday Times. And it's nowhere near finished yet. Scott Sheffield, the founder of Pioneer Natural Resources, told The Daily Telegraph that the Permina could surpass Saudi Arabia's Ghawar field, currently the world's biggest.
Ghawar manages 5mbpd; the Permian, now on 2mbpd, could pump 8mbpd in ten years, reckons Sheffield. He has always been very bullish on shale, but "science now broadly confirms" shale fans' "once-outlandish claims", says Ambrose Evans-Pritchard in The Daily Telegraph. IHS, a consultancy, thinks the Permian contains 104 billion recoverable barrels, five times more oil than is left in the North Sea fields of Norway and Britain.
And getting it out isn't a problem, reckons Sheffield. "We've had such efficiency gains that break-even costs in the Permian are close to $25 [a barrel]." With oil around $50-$55, "we're in the sweet spot". Get set for the rig count "to take off".
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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