When OPEC, led by Saudi Arabia, chose not to cut production last November, it effectively consigned its members to a prolonged period of low prices and the financial strain, palliated only by the hope that the bear market would soon squeeze American shale producers. The petrostate cartel essentially abdicated its market-fixing role on a bet that the relatively high cost of hydraulic fracturing would make American firms the world’s new swing producers, but as the FT reports, that bet is looking more and more suspect:
[S]o far, overall US output seems to be only levelling off, rather than collapsing. If US crude stays at its present level of about $45 per barrel, then it seems likely that production will start falling later this year. But Wood Mackenzie, a consultancy, is forecasting that US oil production will grow this year and next, if there is a rebound in prices to about $60 per barrel. […]The cost cuts and productivity gains that shale oil producers expect come in three categories…First, there are savings from putting pressure on suppliers of drilling rigs, hydraulic fracturing and other services. Companies have generally been saying they expect reductions of 20 to 30 per cent this year.Second, companies benefit from focusing spending on their most productive assets. “You’re dropping all your worst-performing rigs and worst-performing rig crews and moving the rigs you have to your core areas,” says Randall Collum of Genscape, an energy research firm…Finally, there are productivity gains available from improved techniques.
OPEC is now saying that it expects U.S. production to possibly taper off in late 2015, certainly later than most member countries would like. Every month that American output continues in the face of cheap pricing puts tremendous strain on petrostate regimes that rely so heavily on oil sales for budgetary revenue. The Saudis have a sovereign wealth fund big enough to allow them to weather these market conditions for another 20 years, but the rest of OPEC is not so well-prepared.The cartel is next scheduled to meet in June, but all signs point to continued inaction as the group battles for its share of an oversupplied market. Meanwhile, U.S. companies will continue to find ways to bring down their own costs. We’ve said it before, but it bears repeating: bet against American innovation at your own peril.