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Opec's Gulf core steels for longer wait, lower prices in shale struggle
[DUBAI] US shale drilling may be slowing, but not fast enough for Opec to change policy at its June meeting or to prevent oil prices maybe falling more, in the view of the group's Gulf members.
Actual oil output from the United States could prove harder to beat back, sources in the Gulf say after poring over the latest data with top consultants.
The message is, do not underestimate the ability of the oil industry to adapt: there can be cost cuts, restructuring and consolidation and that would take time, the sources said.
"These two years, 2015-16, are still a discovery, everybody is talking about the economics of tight oil but nobody is talking with certainty... you have to wait and see," said a source from a Gulf Opec producer.
At its last meeting in November, Opec kingpin Saudi Arabia persuaded fellow members to keep production unchanged, accelerating the sharp oil price drop to a low around US$45.
Oil Minister Ali al-Naimi has made it clear Riyadh will not cut output to prop up oil markets at the cost of market share.
Opec will have no choice but to hold its course, Kuwait's oil minister said on Thursday, reiterating the view from the Gulf Arab state that the group is likely to keep things as they are in June.
The number of drilling rigs in the United States has fallen steeply in recent months and production growth slowed, although many US producers argue that lower prices will bring efficiency gains and output will not fall so steeply.
The Gulf Opec side believes the wait may stretch into 2016, but analysts say low prices are a potent force.
"Lower prices work. They undermine supply growth and spur demand. Yes, year-on-year there is still a lot of growth in US oil output but month-on-month it has stopped," said Gary Ross, executive chairman and founder of New York oil consultancy PIRA. "You have got to give it time and I believe the Saudis will be prepared to wait until the price magic works. And it will work."
Opec has said it believes global oversupply amounting to as much as 1.5 million barrels per day will evaporate as demand picks up and US production could start to take a hit by late 2015.
However, should US oil producers prove more resilient, oversupply could persist and even grow more if Western powers and Tehran reach a nuclear deal this year that may eventually allow Iran to increase its oil exports.
Despite the reduction in oil-directed rigs by over 40 per cent since hitting a record high of 1,609 in October, there are few signs US production has slowed.
"Despite the big drop in the rig count, we should continue to see US supply growth for another few months," said Yasser Elguindi from economic consultants Medley Global Advisors.
"Many companies have began to reposition rigs away from higher cost, less productive areas, into areas where they know they will have lower costs and higher productivity. Not everyone has that option, but those that can, are doing this."
The rig count is an indicator but it is not a decisive one, said another Gulf Opec delegate: "We thought that there will be a lot of impact on the shale but it seems that the companies are still managing." On Friday, the International Energy Agency said steep drops in the US rig count have been a key driver of the recent price rebound, which saw Brent crude rising to US$60 per barrel.
But the IEA said the United States may soon run out of spare capacity to store crude, which would put additional downward pressure on prices and that US supply "continues to defy expectations." Gulf Opec members were caught out by the scale of the oil price collapse.
They thought that prices would fall to US$70 or even US$60 a barrel and that alone was enough to slow production of high cost producers and gradually push prices higher in the second half of 2015, Opec delegates and watchers say.
But some Opec sources remain doubtful. They say that prices may have to drop to US$40 a barrel and stay there for as long as three years to have a real impact on the unconventional oil production from North America and absorb the oversupply in the market.
"It is not because prices went down for a month or two that we will see an impact on tight oil. We are still in the same swing, up and down," said another Opec source.