Shale Oil is Still Relevant Despite OPEC-Driven Price Hikes

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Global demand for crude oil and refined petroleum products will continue to support U.S. production through 2050, the U.S. Department of Energy (DOE) said.

The U.S. Energy Information Administration (EIA), the statistical arm of the DOE, expects total domestic crude oil production will average 12.4 million barrels per day (BBL/d) in 2023, a 4.7% increase over year-ago levels. Production is expected to increase another 1.5% next year to 12.6 million BBL/d.

The latter figure--a 1.5% increase year-on-year--is a concern for market watchers. Five years ago, U.S. production increased by close to 2 million BBL/d, but the 1.5% gain from 2022 levels represents only 200,000 BBL/d.

At its peak, shale oil production was showing year-on-year gains of more than 10% and federal analysis suggest growth starts to stall out by 2030. That decline coincides with trends in consumption outlined in BP's (NYSE:BP) (London, England) annual outlook for 2023.

Total consumption in two of the three scenarios outlined by BP peaks in the late 2020s, with final energy consumption falling as much as 30% below 2019 levels by 2050.

"Although U.S. consumption of petroleum products remains relatively flat, international demand supports U.S. exports of petroleum and other liquids," EIA's report read. "The dynamics of international trade affect domestic production of natural gas and of petroleum and other liquids."

The dynamics of international trade changed last week when WTI-Midland, a U.S. benchmark reflecting activity in the Permian, was included into the North Sea blends that make up the Brent basket.

Most of the shale oil from Midland makes its way to export markets. Those exports are accelerating far quicker than production, jumping from around 500,000 BBL/d when an export ban was lifted in 2015 to 4 million BBL/d in recent weeks.

Production of light, sweet shale is more than U.S. refineries can handle. It is Canada, rich in viscous bitumen, that's the No. 1 crude oil supplier to the United States, after all, suggesting the refinery slate isn't necessarily tooled for domestic blends.

Permian, however, matches up quite well with the assays for what's already in the Brent basket - Brent-Ninian Blend, Ekofisk, Forties, Oseburg and Troll.

The outlook is similar for refined petroleum products.

"Although domestic consumption of petroleum and other liquids does not increase through 2040 across most cases, production of U.S. petroleum and other liquids remains high because of more exports of finished products," the EIA stated.

Shareholders, however, are stressing capital returns over new production and the global market has changed in profound ways because of the COVID-19 pandemic and the war in Ukraine.

Demand destruction during the pandemic offered room for the energy transition, while the poles of supply and demand change along with the international makeup. The United States exports more crude oil than all but two members of the Organization of the Petroleum Exporting Countries (OPEC) produce, and total production eclipses both Russia and Saudi Arabia.

It's already the world leader in liquefied natural gas (LNG) exports.

Barring events such as inclement weather, however, what happens in the United States doesn't impact the market quite like decisions at OPEC. Sunday's surprise decision to trim 1.6 million BBL/d in production come May led to a 6.4% jump in the price of Brent during Monday trading and some analysts see $100 in the cards by summer.

"OPEC wants and needs a higher price, and they are back in the driver's seat to obtaining their wishes," James Mick, a portfolio manager at Tortoise Capital Advisors, told Reuters on Wednesday.

What's good for OPEC might be good for other producers too. Comments offered to the Federal Reserve Bank of Dallas show drillers are concerned about lower oil prices, which impacts investments. But if prices go up in response to OPEC, that should incentivize investments.

That said, in the EIA's "high oil price" scenario, production responds short-term, but falls after 2030 because increased exploration and production crowds the shale patch and leads to lower well productivity.

"Eventually this trend becomes unprofitable, at which point new drilling stops," EIA warned.

But the longer the time horizon for forecasts gets, the less reliable it becomes. Change is inevitable, but right now, with the inclusion of WTI-Midland, overall export strength and shifting global dependencies means U.S. energy still moves markets.

For Edward Moya, a commodities analyst at New York broker OANDA, U.S. oil matters and OPEC is not necessarily driving the market itself.

"WTI crude should find a home around the $80 level but if recession fears become more entrenched, more of the OPEC+ surprise production cut gains could be given back," he wrote.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).