OPEC+ Will Outlive Shale and Prices Will Soar

A form of cognitive dissonance seems to be taking over oil market watchers, a sort of a blind belief that US shale oil production is set to grow, and grow at an aggressive rate, indefinitely. This erroneous belief seems to be the underlying cause for much of the pessimism as to the oil price outlook over the coming years. While, it is undeniable that US shale growth over the last several years has been nothing short of phenomenal, the US shale industry geological and financial resources are not infinite. The Hedge fund fake news or in the olden days what we called spin is US shale oil growth is virtually unlimited and OPEC is fighting for a lost cause. markets. organization that more off-putting. In 2014, prior to the shale induced oil price collapse, OPEC produced 30.6M barrels per day (OPEC Annual Statistical Bulletin). In Q1/19, OPEC produced 30.4M barrels per day (OPEC MOMR). A cursory review of the data indicates that OPEC has barely reduced its production since 2014. Furthermore, if one were to exclude Venezuela and Iran from the calculation due to US sanctions, one would notice that OPEC production actually increased during this period from to 24.8M bpd to 26.8M bpd, or a 2M barrels increase. In terms of market share (excluding Venezuela and Iran) OPEC market share actually increased from 26.8% in 2014 to 27.1% in Q1/19. It is obvipus the  research underpinning much of the press critical of OPEC is not based on the facts.  OPEC in collaboration with Russia, has been pursuing a very shrewd strategy of opening a path for US shale to claim a slice of the market with minimal market disruption possible. Saudi oil minister, Al-Falih, said  on July 1st: “I have no doubt in my mind that U.S. shale will peak, plateau and then decline like every other basin in history.” In December 2018, Russian energy minister, Alexander Novak, took a similar position by voicing doubt as to US shale ability to grow in the medium term. Basically, OPEC and Russia are planning to wait out the strong growth phase in US shale, and the reality is they probably don’t have to wait too long. US shale growth due to a host of geological, financial and logistical factors is set to slowdown in the early 2020s. Rystad Energy, one of the staunchest believers in US shale, is expecting US production growth to slowdown meaningfully as early as next year: After having grown by 2.1M bpd in 2018, Rystad expects US oil production growth to slow to 1.3M bpd in 2019, followed by another slowdown to 900K barrels bpd by 2020. Said another way, Rystad expects US oil production growth to slow by 60% between 2018 and 2020. Rystad is not alone, the EIA, in its latest STEO, is forecasting US crude production growth to slow from 1.4M bpd in 2019 to 900K bpd in 2020, or a 35% decrease in the growth rate in one year. The IEA is no different, its expectating a slowing in US liquids growth from 1.7M bpd in 2019 to 1.3M bpd in 2020. The trend in all these forecasts is unmistakable: US production growth is set to deaccelerate sharply from 2020, and it will only get worse down the line as the sheer size of US oil production, and the industry persisting inability to generate positive cash flow, makes sizable production growth ever harder to sustain. Nothing captures the demoralized spirit of US shale producers as Scott Sheffield, CEO of Pioneer Natural resources, back in 2014, Mr. Sheffield Schlotterbeck, former CEO of EQT labelled the shale gas revolution as an “unmitigated disaster” while listing a total of 172 North American E&P companies, with nearly $100B in debt, that filed for bankruptcy since 2015, as well as, highlighting the 80% loss of value for the remaining key players. Echoing Mr. Schlotterbeck, Scott Sheffield at Pioneer Natural Resources said to this WSJ, “We lost the growth investor, now we’ve got to attract a whole other set of investors.” (Translation: Now that we’ve lost the confidence (and the money) of the first group of gullible investors, we need to find a new set of naïve investors.). Over the past 10 years, 40 of the largest independent oil and gas producers collectively spent roughly $200 billion more than they took in from operations according to the Wall Street Journal.  Multiple datapoints and a host of reliable forecasters signal an impending flattening in US shale production growth, and as that flattening takes place, OPEC will claim ownership of the oil market once more. While, the US shale industry has grown its production significantly since the oil price collapse in 2014, OPEC’s core members have managed to protect and grow their market share. Most importantly, the surge in US oil production has drowned the US E&P industry in red ink: close to 200 E&P companies have filed for bankruptcy and hundreds of billions of dollars in US energy stocks market value have been lost. Furthermore, the E&P industry has lost access to the debt market and equity markets, meanwhile industry insiders are being forced to admit their mistakes, change their ways and walk down their rosy production forecasts.   The OPEC+ policy of awaiting a projected flattening in US shale growth is the literal definition of an end game. As to the “abundance of supply”, it is not as much of oil as it is of cheap capital, and now that Wall Street has closed the money spigots, the illusion of unlimited US shale growth is soon to be shattered.