Oil In The New World
Written by Sean Cronin, Senior Editor for Market Analysis and News at Argus Media.
We’re on the eve of a meeting of OPEC and key non-OPEC allies. Tomorrow, ministers there will decide the production policies of 22 countries that together account for well over half of all the world’s oil output.
Argus reporters in Vienna are hearing today that they are poised to roll over the production agreement, most likely to the end of 2018, although Russia is a little lukewarm over embracing the extension this long before the end of the current deal in March. If they do, they will be extending an unprecedented period of co-operation between producers in the face of the world’s biggest ever oil surplus. Nearly a year and a half ago, over 3.1 billion barrels of oil were held in commercial storage tanks in advanced industrialised economies, almost 400 million barrels more than recent seasonal averages.
The production agreement struck between OPEC and non-OPEC countries almost exactly a year ago to this day has succeeded in removing nearly 1.7 million barrels per day of that oil from the market this year — an unprecedented 97 percent compliance rate among the signatories — and has helped to tilt the global oil market from surplus to deficit, aided in no small part by an unexpectedly strong global economic recovery this year.
OPEC’s heavy lifter, Saudi Arabia is responsible for about half of the organization’s cuts. Russia was late to the party, only reaching full compliance this summer. But it too is responsible for about half the cuts from the non-OPEC side. Hurricane damage in Mexico, internal strife in Iraq and maladministration problems in Venezuela have all helped the producers alliance to meet their production goals.
Inventories were just over 100 million barrels above the seasonal average at the end of the third quarter. And the price of Brent crude has risen by more than a third in the last five months to go back above $60/bl.
But for every action in the oil markets, there is usually an opposite reaction. Cutting this much supply has triggered a response from producers outside the scope of the agreement, which brings us to matters in the US oil patch.
A revolution in oil production techniques over the last decade — horizontal drilling and hydraulic fracturing — has unlocked previously uneconomic supply, triggering a surge in output from oil’s New World. This New World lies in the shale formations of south and west Texas and North Dakota. Shale’s surge, retreat and resurgence has been a major development in global oil markets over the last five years.
The New World of shale helped US oil output grow at roughly 1 million barrels per day for three years in a row in 2012-14. Growth has resumed at about half that rate since the dip in 2016. US government forecasters now see a 700,000 b/d plus increase in US production next year. More bullish private sector consultants see 1 million b/d plus.
New World oil presents a challenge to the market share of producers in the Old World. In oil’s case, in the Middle East. US oil production, before 2016, had been almost entirely kept from world markets by strict export regulations put in place by the Nixon administration in the 1970s. But Congress lifted what had been an effective export ban at the end of 2015. Since the OPEC/non-OPEC production agreement came into place, US crude exports have shot up.
Mideast Gulf producers are losing market share in key parts of Asia-Pacific, in part to the US. China is importing over 750,000 b/d more crude this year than it did in 2016. But imports from the Mideast Gulf have barely shifted the needle with this growth — largely because of the production agreement — while US shipments account for one-sixth of all the extra supply.
New oil flows bring about new price relationships. Extra oil from the US Gulf is finding its way to world markets. And differentials between the seaborne markets and the US coastal markets are emerging. Argus has launched a series of assessments that align the price of US crude markets with the loading and trading timing of Asia-Pacific markets.