Page 6 - NorthAmOil Week 49

NorthAmOil COMMENTARY NorthAmOil
Shale receives a short-term boost
The decision by OPEC and its partners to extend and deepen production cuts, at least in the short term, comes as a boost to the US shale industry
US
WHAT:
Shale drillers have received a short-term reprieve.
WHY:
OPEC and its producer partners have agreed
to extend and deepen production cuts until the end of March 2020.
WHAT NEXT:
A continued focus on fiscal discipline will need to be balanced with steep production declines from shale wells.
SHALE drillers in the US have received a boost, at least in the short term, from the decision by OPEC and its non-OPEC partners to extend and deepen production cuts. During last week’s meeting in Vienna, the group agreed to reduce combined output by an additional 500,000 bar- rels per day (bpd) during the first quarter of 2020. This takes their collaborative cut to 1.7mn bpd, or around 1.7% of worldwide production.
The market received a boost when the group announced a surprise voluntary addition to the cuts from “mainly Saudi Arabia”, bringing the total reduction to more than 2.1mn bpd.
The group did not agree to extend the cuts beyond March despite calls to lengthen them until June or December amid fears of economic slowdown from member states, but Iraqi Oil Minister Thamer al-Ghadban said that an extraordinary meeting would be held in March.
Announcement of the agreement came from Russian Energy Minister Alexander Novak, who told gathered press: “We really do see some risks of oversupply in the first quarter due to lower seasonal demand for refined products and for crude oil.” He added that the details of the deal and the distribution of cuts would still need to be ratified.
Reuters quoted sources familiar with the mat- ter as saying that the latest deal was a compro- mise between Russia and Saudi, with Moscow not having been keen to deepen the cuts and Riyadh supportive of cutting further and extend- ing the agreement.
While Saudi has claimed to the contrary, Riyadh’s desire for deeper cuts is seen emanating from an intention to support the initial public offering (IPO) of state oil firm Saudi Aramco, which last week raised $25.6bn, making it the
largest ever listing ahead of trading beginning later in December.
Shale boost
The group’s announcement came as a welcome development for shale drillers, which have increasingly struggled in an environment of persistently low oil prices and mounting share- holder pressure to prioritise returns over growth. The challenges have been more apparent since crude prices tumbled in the fourth quarter of 2018, forcing a number of producers to readjust their capital spending plans during 2019. The West Texas Intermediate (WTI) price fell from above $75 per barrel at the start of October 2018 to around $45 per barrel by the end of December. And the recovery since then has been limited, with prices peaking above $66 per barrel in April, spiking briefly in mid-September in the wake of an attack on Saudi oil facilities, and remaining below $60 per barrel since. As expected, the decision by OPEC and its partners to cut output further lifted prices, but only slightly, and WTI remained below $59 per barrel on December 10.
However, the alternative could have been worse, with speculation that if OPEC and its partners did not introduce deeper cuts, prices would fall.
Nonetheless, some remain bullish on shale drillers’ ability to perform. Consultancy Rystad Energy said last week ahead of the OPEC meet- ing that even with potentially lower oil prices, the outlook for North American shale remained robust. The consultancy noted that even as US onshore rig counts had fallen, it had not observed a significant drop in the number of wells spud- ded. Meanwhile, investments into the shale industry have also been shrinking as drillers
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w w w . N E W S B A S E . c o m Week 49 11•December•2019