OPEC winning against US shale producers in short-term market

After almost a year of painfully low oil prices, OPEC members are beginning to believe they are winning against upstart U.S. shale producers in a short-term market share contest.

Yet insiders and experts say OPEC is looking for a longer-lasting impact on other high-cost production oil field plans, many in deep oceans, with bigger time scales, even if that means a period of cheap oil prices lasting for years.

Privately, OPEC’s core Gulf members say they have resigned themselves to the idea that the U.S. shale industry’s high-tech flexibility means it will respond quickly when prices start rising again, making the United States the new swing producer in world oil, the role held for so long by Saudi Arabia.

“The oil surplus is slowly being drawn from the market. U.S. oil production is expected to fall to less than nine million barrels per day by the end of this year or early next year,” said an OPEC delegate from a Gulf oil producer.

“But there is one point that no one is looking at which is the delay in the longer-term oil projects, these are four to five-year projects. The postponement of these projects will impact the overall supply in the market.”

The short investment cycle of U.S. shale, where it takes about few months before returns are seen, make it the most sensitive to oil price fluctuation — either way.

Thus the spike in oil prices in June where U.S. crude was trading above $60 a barrel drew out more shale output but the price drop in August will reverse that, OPEC sources say.

And even if rising prices pushed supplies up again, in the long run, higher production from shale is expected to be offset by lower production from conventional high-cost offshore projects from countries such as Brazil and Mexico, the sources say.

“Shale will be a new swing producer of sorts,” said Yasser Elguindi of economic consultants Medley Global Advisors. “Because of its shorter investment cycle, when prices fall shale producers will be the ones to cut first, but likewise when prices go up, they will also be the first to bring up production.

“This complicates life for those who are looking at investments that have a two to five-year investment horizon. But again, the idea is to find the price level that slows down the rate of growth considerably to something more sustainable — and that takes more than two to three quarters of lower oil prices.”

BIG PROJECTS IN DEEP WATER

The drop in oil prices has forced companies to free up capital to help balance their books at the expense of allocating cash to expensive new projects. In some cases, investment decisions have been delayed to allow more time to reset cost structures on projects.

Companies such as BP, Total and Norway’s Statoil have postponed projects ranging from the Gulf of Mexico to the UK North Sea, Nigeria and Indonesia and dozens of other projects would be also likely delayed, according to Norwegian consultancy Rystad Energy.

Consultancy Wood Mackenzie estimated around 10.6 billion barrels of oil equivalent potentially retrievable from deep and ultra-deep offshore projects has been deferred, followed by 5.6 billion barrels trapped in oil sands.

“We’ve slowed the pace in deep water.” Ben Van Buerden, chief executive of Royal Dutch Shell’s, said in January.

Global deepwater production reached 8.8 million barrels per day in 2014, almost 10 per cent of global demand.

Gulf oil sources believe that low oil prices have so far been successful in stimulating demand for crude and will gradually impact the oversupply which will start to be more visible towards 2016 and beyond, a sign that Saudi Arabia’s new market share strategy was working.

In its new medium-term forecast, OPEC sees oil prices rising by no more than $5 a barrel a year to reach $80 by 2020, with higher demand for the group’s oil and lower supplies from other non-OPEC producers.

Though the demand for OPEC is higher than expected before, it is almost flat from current levels, suggesting that OPEC sees slow economic growth over the next couple of years and oil prices will remain depressed, OPEC sources say.

“Next year the oversupply will put pressure on prices, and that’s why no one is expecting $100 (a barrel) till 2040,” said one OPEC source.

Saudi Arabia is holding the line regardless of how low prices may fall and is in it for the long haul, oil sources and analysts say.

“Remember what the Saudi oil minister said last year, even if prices fell to $20, OPEC will not cut,” said one Gulf oil source.