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The US shale revolution waves

By Sonny Atumah
Oil prices slightly went up during the week with the WTI benchmark settling at US$56.87 while the Brent benchmark traded at US$66.65 on Tuesday. The slowdown in demand for petroleum, together with renewed oil stockpiling in the US and the issuing of waivers to eight countries to buy Iranian oil after imposed sanctions, pushed the price of Brent down from US$80 per barrel in October 2018 to US$66.65 on Tuesday. The expected upend could not happen as the United States shale oil production checkmated the OPEC production cuts. Even with supply losses from Venezuela, prices are yet to spike.

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Has the United States Shale oil become a game changer like the proverbial elixir of life miraculous substance once believed to prolong life indefinitely? What appears to be a production war between the OPEC and the United States shale oil may survive in the short term. The United States Energy Information Administration, EIA February Short-Term Energy Outlook forecasts the output from US wells rising from 11.9 million barrels per day at the end of 2018 to 13.5 million barrels per day by the end of 2020. The production at the end of 2020 may decrease from December’s 11.9million barrels per day level to between 11.3 and 11.5 million barrels per day. The United States accounts for 70 percent of the total increase in global capacity to 2024 which analysts believe a drop will occur mostly in areas that have produced the most growth in the last five years. The areas where production drop will occur include the Permian, Bakken, Eagle Ford, Haynesville and Julesburg basins where independent firms operating there have been forced by monetary constraints to cut back on drilling. The recent reductions in debt and equity issuance by these firms assure the output decline. This lower figure represents the production level that should be expected given the financial activity of the independent firms behind the shale output surge. The debt and equity issued by US shale producers declined to US$22 billion in 2018, which is less than half the amount raised in 2016.

For now, OPEC is still grappling with the possibility of an oversupplied market in 2019, amid slower demand growth, robust supply from non-OPEC sources especially the United States. OPEC de facto leader, Saudi Arabia is bent on exporting crude way below 7million barrels per day, bpd out of the 7.6 million bpd for its March and April deliveries to its customers. Under the OPEC/non-OPEC deal for a total of 1.2 million bpd cuts between January and June, Saudi Arabia’s share is a cut of 322,000 bpd from the October level of 10.633 million, to reduce output to 10.311 million bpd, to shore up oil prices and rebalance the market. Saudi Arabia which reportedly pumped 10.1 million bpd of crude is cutting much deeper than it had pledged under the OPEC+ production deal. There were reactions that Saudi Arabia would continue to restrict crude oil exports to the United States. Last weekend, al-Falih said that April would be pretty much the same as March in terms of the Kingdom’s production and exports, with production in April expected to be kept at the March level of 9.8 million bpd.

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It appears the remarkable strength of the shale industry in the United States will drive global oil supply growth over the next five years, to trigger a rapid transformation of world oil markets according to the International Energy Agency’s, IEA annual oil market forecast. By the end of the forecast, oil exports from the United States will overtake Russia and close in on Saudi Arabia, bringing greater diversity of supply, said Dr Fatih Birol, the IEA’s Executive Director. “It will see the United States account for 70 percent of the rise in global oil production and some 75 percent of the expansion in LNG trade over the next five years. This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy. The United States is increasingly leading the expansion in global oil supplies, with significant growth also seen among other non-OPEC producers, including Brazil, Norway and new producer Guyana.

The transformation of the United States into a major exporter within less than a decade is due to the ability of the US shale industry to respond quickly to price signals by ram-ping up production. The U.S. now imports 12 percent of its total oil, compared to 60 percent a little more than a decade ago. The IHS Markit Report published in the Wall Street Journal last Tuesday estimates that without the shale revolution, the U.S. merchandise trade deficit, which totaled about US$800 billion in 2017, would have been more than 30 percent larger. In coming years, further growth of domestic oil and gas production is projected to shift the U.S. energy trade balance even more. The U.S. is poised to become one of the world’s biggest exporters of liquefied natural gas (LNG) and a net petroleum exporter by the early 2020s. Indeed, the strength of the United States as an energy provider features prominently in current trade discussions with China.

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