Will America win the oil race?

Will America win the oil race?
OPEC nations have continued to curb their oil output in order to address the slump in oil prices. However, that is being challenged by America that has continued to increase its..

OPEC nations have continued to curb their oil output in order to address the slump in oil prices. However, that is being challenged by America that has continued to increase its production of shale oil. Will America supplant other oil rich nations in terms of production in 2018?

Research firm Rystad Energy has predicted that the US is likely to ramp up crude oil production by 10% in 2018 to about 11 million barrels per day.

Background

From 2010 until mid-2014, world oil prices were around $110 a barrel. However, price of oil has fallen significantly in the recent years. It is now around $50. To address the sluggish prices, OPEC nations came to an agreement in November 2016 to cap their output until the oil glut was reduced.  In May 2017, they agreed to extend that deal by nine months. This isn’t the first time oil prices have been severely hit due to a glut. Prices of oil fell in the 80s due to falling demand. It resulted in a six-year decline in the price of oil.

Oil shale is an organic-rich fine-grained sedimentary rock containing kerogen from which liquid hydrocarbons called shale oil are produced. It is a substitute for conventional crude oil. Major deposits of shale oil can be found in the US.  The increase in US shale oil production has affected OPEC’s efforts to balance the market and prop up oil prices. The production of natural gas from shale formations has definitely given the United States a new global footing as well as self-reliance.

Shale gas in the United States is rapidly increasing as an available source of natural gas. As of 2010, the development of shale resources supported 600,000 jobs. Affordable domestic natural gas was essential in rejuvenating the chemical, manufacturing, and steel industries. Largely due to shale gas discoveries, estimated reserves of natural gas in the United States in 2008 were 35% higher than in 2006.

To address the sluggish prices, OPEC nations came to an agreement in November 2016 to cap their output until the oil glut was reduced. In 2017, the OPEC nations once again decided on continuing to cap oil output well into this year. The prices of oil have risen has a result of some of these measures. In 2018, it reached a little above $67.

 

Analysis

OPEC nations have continued to curb their oil output in order to address the slump in oil prices. However, that is being challenged by America that has continued to increase its production of shale oil. Will America supplant other oil rich nations in terms of production in 2018?

The U.S. Energy Information Administration had earlier noted that the production of crude oil in 2017 in the region was around 9.4 million bpd especially in the second half. Production wasn’t badly affected despite US being hit by multiple hurricanes in 2017. Research firm Rystad Energy has now predicted that the US is likely to ramp up crude oil production by 10% in 2018 to about 11 million barrels per day.

"The market has completely changed due to the U.S. shale machine," said Nadia Martin Wiggen, Rystad's Vice President of markets. If this is achieved, then the US could supplant Russia and Saudi Arabia in terms of production. Such an event has not taken place since 1975. It was in 1970, when America set a record in terms of production. In 1970, US set its previous high of 9.6 million b/d.

The research group has noted that it was due to the fracking revolution that has resulted in the boom in the oil production and helped America emerge as a leader in the field. Additionally, US President Donald Trump has also promised to ease up on the regulations regarding fracking in a bid to further provide this industry with a boost.

However, not every expert has been sold on the fracking revolution. Byron Wien, vice chairman of Blackstone's (BX) private wealth solutions group has noted that fracking production would be "disappointing" in 2018. He also said that this will result in crude oil prices rising above $80 a barrel. For now, US’ EIA has predicted that production is likely to increase to at least 9.9 million barrels per day.

Assessment

Our assessment is that as production increases, US will be able to beat Russia and Saudi Arabia especially as both nations have cut down their own output. This would affect the prices of oil and in turn affect the plans OPEC has to address the current oil glut. 

Comments