US shale will haunt OPEC for at least the next decade

Bloomberg/Fuel Fix:
OPEC sees no respite from shale’s onslaught before the second half of the next decade. Until then, the cartel will stick with the one weapon it still has to prevent another oil price collapse: austerity.

Although the group’s historic output limits have fueled a 42 percent price rally since late June, OPEC Secretary-General Mohammad Barkindo on Tuesday signaled the producers’ determination to stay the course through the end of 2018. The bogeyman haunting the Saudis, Russians and other major suppliers: U.S. shale, which shows no signs of backing off until at least 2025.

Even as American drillers embrace the new religion of profits-over-production, OPEC’s latest long-term forecast focused on the ability of shale explorers to thrive regardless of prices, thanks to advances in guiding drillbits and fracking. The U.S. rig fleet may be shrinking, but production isn’t. It’s risen 8.9 percent since 2016.

“The Saudis are finally recognizing they can’t kill the shale guys,” said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University. “It’s a brave, new world in the oil market.”

The Organization of Petroleum Exporting Countries surprised investors on Tuesday by boosting its long-term estimate for growth in North American shale production by 56 percent from a year earlier. The 12-nation group now expects output from the continent’s shale wells -- which weren’t even a blip on worldwide markets a decade ago -- to reach 7.5 million barrels a day in four years.

OPEC singled out the Permian Basin of West Texas and New Mexico as a stand-out performer. Investors pouring billions into the region include Exxon Mobil Corp., Chevron Corp. and Occidental Petroleum Corp., all of whom have shifted substantial resources and staff away from less profitable overseas projects.

Still, there are hints on the horizon that the shale boom may be limited.

On-the-ground metrics closely watched by petroleum engineers -- obscure measures like production per lateral feet drilled -- are trending against boundless long-term growth in shale supplies, according to Morgan Stanley research. That, along with a shortage of fracking crews and the specialized gear they employ, suggests that shale explorers may soon bump up against physical barriers curtailing their expansion, Morgan Stanley analyst Martijn Rats said in a note to clients.
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The biggest mistake OPEC made was trying to kill the shale market by engaging in predatory pricing.  What that mainly did is force the shale drillers to become more efficient to the point that in many cases their cost of production was less than that of OPEC.  That has forced OPEC and Russia to have to limit production in order to get the price up to their breakeven point.  I point this out to make the point that they have a history of underestimating US shale producers and the technology used.  It would not surprise me if their current projections miss the mark too.

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