OPEC Is Back In Control Of The Oil Market

OPEC is once again the most influential force in global oil supply – and will be so for the foreseeable future – now that U.S. shale production growth is slowing, American industry executives say. 

The days of exponential growth in U.S. oil supply from before the pandemic are over, as capital discipline, returns to shareholders, supply-chain bottlenecks, cost inflation, and lower well production combine to hold back production increases.    

During the 2010s, the shale industry boomed as companies drilled all they could – often beyond their means – to boost production. U.S. oil supply was growing so quickly that America was often referred to as the new swing producer on the market, capable of ramping up output quickly when global oil prices and demand were rising.  

The post-Covid reality is quite different—U.S. shale production is recovering, but at a slow pace, and output hasn’t reached the record levels from late 2019 and early 2020.

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“The plateau is on the horizon”

The U.S. Energy Information Administration estimates in its latest Short-Term Energy Outlook (STEO) from this week that U.S. crude oil production would rise from 11.88 million barrels per day (bpd) in 2022 to 12.44 million bpd this year. 

The expected growth of 560,000 bpd year over year is half the pre-pandemic growth pace. For several years, U.S. oil production rose by more than 1 million bpd every year to 2019. 

U.S. oil executives also expect just 500,000 bpd growth this year, some said at the CERAWeek energy conference in Houston this week. 

Growth is set to further slow in 2024, with production seen to average 12.63 million bpd next year, per EIA estimates. That’s less than 200,000-bpd growth from the estimated average level for 2023. 

“The plateau is on the horizon,” ConocoPhillips’ CEO Ryan Lance said at CERAWeek, as carried by the Financial Times.

The U.S. oil industry is now prioritizing shareholder returns, despite criticism from the White House. Faster depletion rates at many wells combine with labor and supply chain hurdles to hold back growth.

Chevron, for example, flagged at its investor day last week that it fell short of its performance targets in the Delaware basin in the Permian “primarily due to higher-than-expected depletion after completing long-sitting DUCs.”

OPEC Market Share To Surge 

As U.S. production growth stalls, OPEC’s market share and clout over global oil supply will only rise. The cartel, led by its biggest Arab Gulf producers, is in control of the markets now, shale executives say.

“The world is going back to what we had in the ‘70s and the ‘80s unless we do something to change that trajectory,” ConocoPhillips’ Lance told delegates at CERAWeek. 

According to the executive, OPEC’s market share will jump from around 30% now to close to 50% in the future, in which additional supply comes from OPEC and U.S. shale growth plateaus.  

Scott Sheffield, CEO at the largest pure-play shale producer, Pioneer Natural Resources, told FT on the sidelines of CERAWeek, “I think the people that are in charge now are three countries — and they’ll be in charge the next 25 years.” “Saudi first, UAE second, Kuwait third.”

Saudi Arabia, the United Arab Emirates, and Kuwait all plan to raise their oil production capacity this decade. And they are set to meet a growing share of global oil demand now that U.S. shale cannot and does not want to respond with higher production. 

“The shale model definitely is no longer a swing producer,” Sheffield told FT earlier this year.

The market is now back in the hands of OPEC, but the cartel alone cannot meet all the expected growth in demand. 

OPEC Warns Underinvestment Will Lead To Supply Crunch

Sure, the biggest OPEC producers in the Middle East are investing to boost capacity, but production elsewhere is either shrinking or stalled, while investment in supply has been underwhelming for years, OPEC officials say. 

Source: https://oilprice.com/