"It was all so simple," said Julian Lee on Bloomberg.In 2014, the oil exporters' cartel, Opec, decided to flood the market in order to put US shale drillers out of business and thus preserve market share. Late last year, following a fall in US production, it decided to cut output in order to bolster prices again.
But it turns out shale "is the wild horse Opec can't tame". Saudi Arabia, Opec's key producer, said when it introduced the supply curbs that it didn't expect much of a response from US production in 2017. In fact, overall US production jumped by over half a million barrels per day in the four months since Opec cut output.
At this rate, it could eclipse its previous record of 9.61 million barrels per day (mbpd) by the end of May. The number of active drilling rigs has jumped to almost 700, double the low seen last year. There has never been such a fast drilling recovery in the oil sector. After the 2009 slump, almost two and a half years were required for rigs to double, as Allen Brooks of specialist energy investment bank PPHB points out.
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The rebound is due mainly to rapid improvements in technology, which have made it cheaper to exploit shale formations, thus promoting drilling at ever lower oil prices. Only a few years ago, breakeven prices for shale drillers were deemed to be over $80 a barrel. It now seems that "even the upper end of the range" is in the low $70s, says Liam Denning on Bloomberg.
Opec has a serious fight on its hands, then, and it's only going to get harder from here. It is widely expected to renew the output cut deal at the end of this month. Nevertheless, as Lee points out, "compliance with the cuts may already have been as good as it gets".
Some of the states party to the deal have brought forward oilfield maintenance, which won't need to be repeated later this year. Moreover, as summer temperatures rise, energy demand climbs too, so output cuts over the next few months will mean more forfeited export revenue than over the past few. That could increase incentives to cheat on quotas.
Evidence is mounting, then, that the glut in the market will last longer than analysts initially expected, and therefore that US shale has been able to cap oil prices at a lower level than the highs of the last few years; $70 is the new $1,000, as Denning puts it. Long-term, that is bad news not just for Opec's export earnings, but its social stability too.
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