OPEC+ took centre stage yesterday as the group’s monitoring committee gathered for its latest monthly review. As expected, the producer alliance did not recommend any changes to the current agreement. Instead, the focus was on conformity to agreed cuts. OPEC+ kingpins Saudi Arabia and Russia pressed the likes of Iraq, Nigeria and the UAE for better compliance to output cuts. Cumulative overproduction has reached 2.38 mbpd from May until August. The laggards have now been given until December to make up for any overproduction thus far.
As well as clamping down on non-compliant OPEC+ members, Saudi Arabia took aim at speculators with a warning not to bet against the oil market. The country’s energy minister promised those who gambled on the oil price in the coming months would be hurt “like hell”. This amounts to throwing down the gauntlet for the naysayers. He went on to hint that OPEC+ could hold an extraordinary meeting next month if oil markets weaken further.
Unsurprisingly, market players responded favourably to OPEC’s bullish chatter. Oil prices reversed early losses to finish with solid gains. Brent closed $1.08/bbl higher at $43.30/bbl while WTI tacked on 81 cts/bbl to settle at $40.97/bbl. The same can’t be said for shares on Wall Street which buckled as investors were left disappointed by the Federal Reserve. Despite pledging to maintain accommodative rates until at least 2023, the failure to hint at fresh stimulus caused alarm on the trading floors. All the while, sentiment was also dealt a blow by the US labour market’s ongoing woes. Jobless claims dipped to 860,000 last week, down from 893,000 in the previous seven days but still painfully high. Few expect a meaningful recovery to materialise without an injection of fresh fiscal support from Washington.
US shale back in the red
There are no prizes for guessing the most negatively impacted oil market in the world. US shale production dropped by more than 2 mbpd in April and May as the coronavirus pandemic and a price war between Russia and Saudi Arabia sent demand tumbling. Mercifully, US shale curtailments eased over the summer months as demand and prices recovered. Now though, the alarm bells are once again ringing, according to the latest EIA drilling report.
US tight oil supply is expected to decline to 7.64 mbpd in October, down 68,000 bpd from September and the first drop in five months. Of the seven major shale oil basins, only the Permian is expected to see higher production next month. The darkening production outlook comes on the heels of sweeping job losses, massive asset write-downs and several high-profile bankruptcies. Alongside these glum forecasts, the US shale patch was dealt a symbolic blow this month after oilfield services heavyweight Schlumberger sold its North American fracking business. This decision to exit the US shale patch is the latest sign that the industry’s previous highs will unlikely be revisited.
For all this alarmism, there are some nuggets of positives in the updated EIA drilling report. To begin with, the number of drilled wells across the major US shale formations held steady last month after a lengthy downturn. This echoes latest Baker Hughes data showing the domestic rig count appears to have stabilised after plummeting by 76% since the start of the year. All the while, improving well productivity suggests US shale producers have become more efficient than ever. New-well oil production per rig in the Permian is forecast to rise to 1,192 bpd in October, the highest on record.
And there is more encouraging news. The number of completed wells increased last month for the first time since February. This indicates that US shale players are putting their trump card into play, namely the extensive backlog of drilled-but-uncompleted wells. These so-called DUCs represent a readily available source of supply that can be brought with relatively little effort and expense. DUCs have been trending higher for most of 2020 but fell in August by the most this year. That said, they do not represent a panacea for US shale’s woes. Bringing production online by manner of DUCs is merely a stopgap which at best offsets base decline at producing wells. Crucially, they do not contribute to supply growth. Fresh drilling is needed for a sustained period of growth in US shale output. Yet the current price level is not high enough to instil the necessary incentive to recommission long-idled drilling rigs.
And it’s not only the current price environment that is not conducive for a rebound in drilling. The US shale patch is facing headwinds from the prospect of a Biden presidency. The current front-runner for the Oval Office has promised to stop issuing new federal drilling permits. In response, shale players have rushed to hedge against this risk by scrambling to secure drilling permits on federal land. Federal permitting in the largest US oilfield in the Permian Basin surged by 80% in the 90 days up until August 24 compared to the same period in 2019, according to data firm Enverus.
In the meantime, the unusually high inventory of DUCs should help sustain fracking without the expansion in drilling activity. Rystad Energy expects US fracking activity to hold around current levels for the rest of the year and through the first half of 2021. However, the outlook for renewed drilling and therefore production growth is far from encouraging. Underscoring this view is Norway’s Equinor. It recently announced it will not drill any more wells in the U.S. shale patch this year as it adjusts to a lower-for-longer oil price environment. In short, US shale will continue to suffer from unprecedented distress in the absence of a sustained price recovery.