alinaimi-saudi

An interesting phenomenon is unfolding in the global oil market as 2017 gets underway, and it has echoes of “déjà vu all over again.” US light tight oil (LTO) production is seen rising in 2017, and a growing number of global and national watchdogs, as well as banks and analysts, see increasing US production as once again posing a threat to oil prices, even after OPEC and major non-OPEC producers agreed to cut output by a total of about 2.1 M/bpd (OPEC: 1.5 M/bpd + NON-OPEC: 580,000 = 2.1 M/bpd).

The EIA’s most recent Drilling Productivity Report says that oil production from the seven major US shale plays will rise by 41,000 bpd to 4.748 M/bpd in February from January. These seven regions represented 92% of domestic oil production growth and all domestic natural gas production growth during 2011-14. Unsurprisingly, and par for the course over the last year, the Permian Basin in West Texas will likely see sharpest rise of 53,000 bpd.

The agency took a broader view in its STEO report released the previous week, which sees US crude oil production averaging 9 M/bpd in 2017 and 9.3 M/bpd in 2018, after averaging 8.9 M/bpd in 2016. The forecast increases in output largely reflect increases in federal offshore Gulf of Mexico production. Rising tight oil production, resulting from increasing drilling activity as oil prices recover, as well as increased rig efficiency and well-level productivity, also contributed to the upward revision of the agency’s forecasted US production growth.

Citigroup said in a note earlier this year that if oil prices pass $70/bbl, the US could begin production an extra 1 M/bpd, offsetting much of the planned OPEC cut. Oil prices at $60/bbl could translate to an extra 500,000 bpd of US production. Factor in the unlikelihood of OPEC’s complete adherence to the production cut deal, and the exceptions granted to Iran, Nigeria and Libya in the deal, and a bearish cloud once again could appear on the horizon.

What is particularly interesting is the context of what could potentially become a revival of US production, which began tapering off around September 15. Recall that Saudi Arabia’s former Oil Minister Ali Naimi coordinated OPEC’s market share defense strategy in late November 2014. It was he who led the charge against US producers, saying time and time again that it was unreasonable to ask “more efficient producers” (i.e. OPEC) to cut while not asking “less efficient producers” (i.e. US shale) not to cut. This was the rationale for OPEC’s pivotal decision in November 2014 to maintain its then-30 M/bpd quota. Prices tanked after that, layoffs mounted (about 200,000 in the US alone by some estimates), capexes were cut, projects delayed and cancelled, and morale at its lowest level since the 80s downturn.

A year later, OPEC jettisoned its quota altogether, effectively allowing its members to produce at will. Then Saudi’s strategy subtly – and then not so subtly- began to shift with the replacement of Ali Naimi with Khalid al-Falih of Saudi Aramco. Al-Falih and his boss, the powerful deputy crown prince of Saudi Arabia, began sounding overtures about freezing production or even cutting it, as Saudi sought to diversify its economy away from oil. A preliminary deal was reached in September, followed by the conclusive one on Nov. 30. Russia and some other major non-OPEC producers signed their own pact in early December.

During this timeline of events last year, US shale producers were slashing costs, focusing on efficiency gains, recalibrating their strategies to be able to ‘do more with less,’ and preparing for a rebound in oil prices. In other words, they were preparing themselves to return and reclaim the market share lost in 2015.

So in a very palpable sense, the market share war that under girded the first part of the oil market narrative- from November 2014 to mid-2015, arguably- has never ended. Saudi did not cry ‘uncle;’ neither did the US. Saudi instead first shifted its market share strategy against Iran upon the latter’s return to the oil market in early 2016 after sanctions were lifted (and after it saw US production rolling over). But what a difference a year makes, as by the November 30 meeting Saudi had even granted its archnemesis an exemption to the OPEC production cut deal.

And all of these developments have to take into consideration President Donald Trump, whose pledge of taxing oil imports has particularly worried Saudi Arabia. Will they respond with hostility or obeisance? This remains to be seen.

2017 could very well end up bringing the market share war component of the oil market downturn to the fore once again, particularly if US production rises as much as some expect. How will OPEC respond? The answer to that question depends on where Saudi Arabia happens to be situated at that time and how it ‘reads’ the global oil market. 2017 will undoubtedly be an interesting year.

About The Author Jeff Reed

I specialize in analysis of the oil and gas sector- with emphasis on the Middle East, OPEC, and the politics of energy. I hold a BA in Political Science and MA in Theological Studies from the University of St. Thomas. Prior to a career in oil and gas journalism, I was a Roman Catholic priest serving churches in the Houston area. I also taught high school for a year in Oakland, California, and worked for two years in retail management. Among my other areas of interest are political philosophy, religion and society, culture and the arts, and philosophy.