Syed Rashid Husain

 The writer is Vice President of Al-Khobar-based Al-Azzaz Est., eminent journalist and energy analyst. He writes a popular weekly column   ‘Energy Outlook’ for Saudi Gazette and also contributes to Pakistan’s Dawn and the BBC.

Market Firm up for Now

by shariff mohammed | Mar 02, 2017

Despite skepticism expressed by many, compliance with the OPEC output cut remains healthy. This is firming up markets. Yet the prospect of a revitalized US shale sector continues to haunt crude sentiments. The US is expected to see capital investment recover quickly. And this could be a fillip to the US domestic crude output, undercutting the efforts of the Organisation of the Petroleum Exporting Countries and Russia.

Efforts, however, are on to balance the markets. Saudi Arabia has already cut its oil output to the lowest level in almost two years, going below 10 million barrels per day. This is more than Riyadh had promised. Still deeper cuts are on way, energy minister Khalid Al-Falih announced. In order to give a positive push to the markets, Riyadh seems determined to tighten crude output further in February.

And in the meantime, defying pundits Opec wildcard Iraq is also slashing exports. Baghdad’s Energy Minister Abdul-Kareem Al-Luaibi said his country has slashed crude exports by 170,000 bpd and was cutting them further by 40,000 bpd this week. Kuwait too has cut its oil exports by more than 133,000 bpd.

Algeria, which pledged to trim production by 50,000 bpd, has also started cutting output. As per the Algerian Energy Minister Noureddine Boutarfa, his country reduced output by 60,000 bpd in January. Algeria also seems on the way to cut output by as much as 65,000 bpd. UAE is also moving ahead with its output cut pledge.

Keeping to its commitments, Russia has also begun cutting oil production in line with the OPEC agreement, Russian Energy Minister Alexander Novak told reporters in Moscow. Although he declined to give a number to output cut by Moscow in January, insisting instead, the number would depend on the weather.

The overall prognosis seems healthy. 

But despite all this, analysts continue to be weary. US shale producers are not a party to the output cut agreement and could undermine the producers’ strategy by raising output, many are now insisting.

Recovery in oil prices could help stimulate activity in shale plays in the United States. US shale oil production is expected to grow by around 300,000 bpd in 2017 to around 4m bpd, energy consultancy Wood Mackenzie is now projecting.

Last month, the EIA too reversed its forecast of a decline in domestic US crude output for 2017 and beyond. The new projection estimates that the US domestic oil production is set to increase slightly this year to 9m bpd. The January figure is also very close to it. The figure was down to 8.6m bpd in Sept 2016. U.S. domestic crude output is projected to expand further by 3 per cent in 2018.
The Permian shale basin in Texas may be the greatest benefactor from improved prices. Total oil production from Permian this year should average around 2m bpd.
If WTI holds around $50 per barrel at least, Platts estimates production could grow by at least 75,000 bpd. Early indications already show a big jump in the rig count in the Permian Basin compared to a year ago. Then the rig count was standing at 209. Today the number is surpassing 267.
Investment in the sector is also going up. Wood Mackenzie says total spending in the Lower 48 states is expected to grow by 23pc to $61 billion. Spending on exploration and production should also grow by 3pc to $450bn, while the deepwater US basin is also expected to “spring back to life” in 2017.

Contributing rather adversely to the overall market balance is the growing efficiency of drillers. One consequence of this trend has been the stunning rise in output from an average US oil well. One measure of productivity is the estimated ultimate recovery (EUR) – the total amount of hydrocarbons extracted from a single well. In 2016, the EUR of the average US horizontal shale oil well was 736,000 barrels of oil equivalent, more than double the volumes four years ago, Rystad reported. Average drilling times too have fallen from 29 days to 20 days since 2013.

The emphasis on drilling economics has been great too. In core areas of the Permian and Eagle Ford basins of Texas, the amount of crude produced per foot of pipe in the ground has increased between 70-120pc from 2012 to 2016, with further gains to come in 2017, the Rystad report highlighted.

Courtesy the output restraint arrangement, markets have firmed up. That’s a good omen. Yet, how long is this sustainable remains a big if? When seen from a shale perspective, the mid-long term prospects appear shaky.
Al-Falih still has challenges to surmount!

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