The last barrel

In 2014, the American shale boom had increased U.S. output and was cutting into OPEC’s market share. To counter the game-changing threat, Saudi Arabia unleashed a 1970s-style price manipulation policy, despite weakening demand and ample supply. The Saudis, and their OPEC buddies, elected to flood the market with cheap crude to drive prices down in an attempt to bankrupt the budding U.S. shale industry. When benchmarks plummeted, oil-dependent nations, including Russia, Nigeria and Venezuela, had to increase production to compensate for the loss of export revenue, putting more crude on an already saturated market. The strategy worked to perfection, and in February 2016, the U.S. oil industry’s fate seemed to rest in the hands of OPEC ministers, who had successfully pushed WTI down to $26/bbl and decimated the OFS sector.    

Strategy backfires. However, by May 2016, the loss of oil revenue had damaged the commodity-based economies of most OPEC nations, and the cartel gave the cease-fire command. Saudi Arabian Oil Minister Ali Al-Naimi “retired” and was replaced by Khalid Al-Falih, who did an immediate about-face and called off the price war. Al-Falih subsequently orchestrated an output-cutting deal with their OPEC allies, and most importantly, Russia. Thus, OPEC+ was born. The new strategy of higher prices supported by production limits was adopted, apparently conceding a role for U.S. shale producers, if they could recover. Although U.S. output dipped, it didn’t collapse, and producers lived to fight another day. Although the downturn was painful, the gut-check forced the industry to innovate, cut costs and become ruthlessly efficient.  

Phoenix. Rising from the ashes of a seemingly insurmountable defeat, the U.S. shale industry, rife with small independents who outpaced the majors, led a spectacular comeback that turned the nation into a net oil exporter during December 2018. Although mostly symbolic at this time, the landmark event broke 75 years of continual dependence on foreign oil and marked a pivotal moment in President Trump’s “energy independence” initiative (Bloomberg). It also achieved a rhetorical aspiration trumpeted by American presidents for decades. While the U.S. has been headed in this direction for years, it remains exposed to global energy prices and the old geopolitics of the Middle East. 

“The U.S. is becoming the dominant energy power in the world,” said Michael Lynch, president of Strategic Energy & Economic Research. “But, because the change is gradual over time, I don’t think it’s going to cause a huge revolution, but you do have to think that OPEC is going to have to take that into account when they think about cutting.” Shale production has transformed the U.S. into the world’s largest petroleum producer, surpassing Russia and Saudi Arabia. And in November, production hit another all-time high of 11.58 MMbopd.   

Production predicted to grow despite lower prices. The EIA left its forecast for U.S. crude production unchanged for 2019, even with prices averaging approximately $11/bbl lower than its previous estimate. The agency projects companies will produce an average 12.06 MMbpd in 2019, up from 10.88 MMbpd in 2018. While bottlenecks in the Permian basin pose a risk to future growth, new pipelines coming online in late 2019 and 2020 should ease that congestion. The U.S. will account for almost one-fifth of global petroleum liquids output next year. Producers aren’t cutting funding in U.S. fields either, despite prices dropping more than 30% from the October highs. ConocoPhillips said it plans to spend half its 2019 budget in the continental U.S., while Chevron plans to invest $3.6 billion in the Permian, alone. 

OPEC influence diminished. The significant increase in U.S. production complicates OPEC’s decision-making process. At its last meeting in Vienna, the cartel elected to reduce output 530,000 bopd to support prices. The policy has lifted prices, but it risks the loss of additional market share to U.S. shale producers. And in December, Qatar announced that it was leaving OPEC in a rare example of toxic Middle Eastern politics rupturing the group that had held together for decades through war and sanctions. Although Qatari Energy Minister Saad Sherida Al-Kaabi said the country was leaving to focus on LNG production, strained relations with Saudi Arabia led to a blockade against his country since 2017. 

“The symbolism is profound,” said Helima Croft, commodities strategist at RBC Capital Markets and a former analyst at the CIA. “Given that concentrating on LNG should not be incompatible with OPEC membership, the move will invariably lead many to conclude that the geopolitical divisions had become too intractable.” The departure of Qatar “presents a public-relations and perhaps a sentiment problem” for OPEC at a crucial time, said Joe McMonigle, Hedgeye Risk Management and a former official at the U.S. Energy Department. 

Long strange “trip.” During his keynote speech at World Oil’s ShaleTech Conference, held Dec. 5 in Houston, ConocoPhillips CTO Greg Leveille quipped, “although it took 150 years for producers to find the biggest fields in the U.S., the benefits are huge.” The shale revolution has provided the U.S. with energy security and will have an enormous economic impact for years to come. The increase in natural gas output will reduce CO₂ emissions by enabling the U.S. to continue to switch from coal to gas, to generate electricity. “The U.S. is now a major player in the export market,” said Brian Kessens, who helps manage $16 billion at Tortoise in Leawood, Kansas. And “we continue to re-tool our export infrastructure along the Gulf Coast to expand capacity.” Maybe the increase in crude exports will help reduce the trade-deficit with China too? Let’s hope so! 

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com