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Crude Economics
US Shale is the Biggest Winner from an OPEC Cut

OPEC may finally be feeling relevant once again, but that sentiment is likely to fade if the cartel actually follows through on its agreement for the “need” to cut output made yesterday in Algiers. The group of petrostates tentatively agreed to cut its production by roughly 800,000 barrels per day, amounting to roughly half of the current glut that has depressed prices over the past 28 months. If they follow through with that plan at their next scheduled meeting this November—and that’s a very big if, going by their recent actions (or should we say inaction)—Goldman Sachs estimates oil prices should rise between $7 and $10 per barrel.

But let’s set aside our well-grounded skepticism and assume for the sake of argument that OPEC does manage to cobble together some sort of consensus two months from now and make the cuts they outlined yesterday. As we said yesterday, if that happens and prices rebound, it won’t be the cartel that comes out ahead—U.S. shale will be the big winner. The FT reports:

The celebrations will be loudest in the boardrooms of Houston and Oklahoma City. The US shale oil industry has been in retreat for most of the past two years but it has started to turn the corner. Since May the number of rigs drilling for oil in the US has been rising. Companies that had been outspending their cash flows for years have been bringing their finances under control thanks to cost cuts and productivity gains. […]

…[T]he move from $40 to $50 makes a big difference. Chevron, one of the largest US oil groups, said this month that at $40 oil it could drill about 1,300 profitable wells in the Permian region, but at $50 it could drill 4,000 such wells. EOG Resources, a company that was a pioneer of the shale oil revolution, said last month that with oil at $50-$60 per barrel, it could increase its production by 10-20 per cent every year.

OPEC’s new course “gives U.S. producers more confidence” and could make American frackers “a touch more aggressive than they had planned to be,” Evercore ISI partner James West told Reuters. Vice president of oil research for Woods Mackenzie Ann-Louise Hittle echoed that sentiment, saying that the sort of market stabilization OPEC is seeking should “lead to an increase in the [U.S.] rig count…and an increase in production.”

The shale boom took the world by surprise, but bargain crude prices have forced a slight decline over the past year in U.S. oil output. American shale firms proved more resilient than most analysts (and, it must be said, most petrostates) expected, finding innovative new ways to keep the oil flowing despite shrinking profit margins. Now, with OPEC seemingly prepared to take action, many shale plays that have become unprofitable during this bearish time period will once again be open for business, leading to a corresponding bump in U.S. output.

This is what the Saudis and the rest of OPEC have feared for so long: that, by coordinating production, they’d only be ceding market share to upstart producers like American frackers. But the pain of $45 oil may finally be too great to bear, and if that’s the case this November, it will be private companies here in the U.S. that will be cheering the loudest.

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  • Proud Skeptic

    Loving this. Revenge is a dish best served cold.

  • Pete

    OPEC is so stupid in thinking that cutting their oil production will enhance their revenue.

    The only solution for OPEC countries is to cut the cost of their government subsidies (i.e., budget expenses) .. but they dare not do that, right?

    There is no way out for OPEC. Those countries never deserved the revenues that received in years past and now that party is over.

  • Andrew Allison

    This is a recording: the US is the swing producer, OPEC is irrelevant.

  • rpabate

    President Hillary could come to their rescue. She will set the EPA loose on the frackers creating cheers all over the ME. Just think of the monies that will flow into the Clinton Foundation, all for a good cause, mine you.

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