Rising shale oil production in the U.S. is poised to boost the supply glut in the global oil market pushing crude prices lower, while also forcing OPEC to make further curbs to its production in the first half of 2019 on top of its latest output cut decision.
OPEC members agreed on Dec. 7 to lower total production by 800,000 barrels per day (bpd) beginning Jan. 1 for six months. Non-OPEC members led by Russia will also join the agreement by curbing their total output by 400,000.
Conventional wisdom suggests that if OPEC and its allies, dubbed as OPEC+, curb their production, more supply will be taken out of the market resulting in higher oil prices.
Yet, this could turn out not to be the case since U.S. shale oil production is expected to intensify further, especially with higher oil prices.
Even if OPEC+ curbs its total crude oil production by 1.2 million bpd to trim the glut of supply in the global market, rising U.S. shale oil production is anticipated to rapidly fill the supply void.
- US hike to equal non-OPEC cut
The U.S.' crude oil production hit a record high level of 11.7 million bpd for the week ending Nov. 9, according to the Energy Information Administration (EIA), and took the top spot in the world by surpassing the production of Russia and Saudi Arabia.
Crude oil production in the U.S. is estimated to average 12.1 million bpd in 2019, according to the EIA's Short-Term Energy Outlook in December.
If this average production level is reached in the first half of next year, it would be a 400,000 bpd hike from the U.S.' current record high level -- or equivalent to the total amount of non-OPEC's planned cut.
Most of the increase in the U.S.' crude oil production is anticipated to come from shale oil, which is expected to hit record high levels in December and January.
Total shale oil output in the most prolific seven shale plays in the U.S. is estimated to increase by 201,000 bpd, or 2.5 percent from November, to reach a record high of 8.03 million bpd in December, according to the EIA's Drilling Productivity Report released on Dec. 17.
Shale oil production is forecast to continue climbing in those seven plays by another 134,000 bpd, or 1.7 percent, to a fresh record of 8.17 million bpd in January, the report said.
"There is a huge increase in U.S. shale oil and it is changing the balance in the oil market," Fatih Birol, the executive director of the International Energy Agency (IEA), told Anadolu Agency on Dec. 21 in an exclusive interview.
"We are entering a period where crude oil prices will not be determined only by Russia and countries in the Middle East. Oil prices are no longer shaped by the decisions in Vienna [OPEC headquarters], but in Texas as well," he added.
Birol provided a forecast that estimated that the U.S.' crude oil production could become "almost" equivalent to the combined production of Saudi Arabia and Russia by 2025.
- "OPEC+ cuts encourage US shale"
American investment bank and financial services firm Citigroup said on Dec. 10 in a note that output cuts from OPEC+ would encourage U.S. shale producers to pump more crude into the global oil market.
"OPEC+ did the work of drawing down inventories that otherwise would have to be done through a painful period for shale producers," Ed Morse, the global head of commodities research at Citigroup, said in a note.
"The more OPEC+ tries to support prices by withholding oil from the market, the more they give the U.S. shale sector an out from rationing supply growth themselves," it added.
The firm said it forecasts Brent crude trading between $55 and $65 per barrel in 2019, but warned that the benchmark could decline to around $40 a barrel if the OPEC cut deal does not work.
American multinational investment bank and financial services firm Morgan Stanley said on Dec. 10 that it lowered its oil price forecast by $10 a barrel for next year.
The firm said it now expects Brent crude to average $68.50 per barrel in 2019, down from its previous estimate of $78.50.
The OPEC+ deal will prevent building oversupply in the global market during the first half of 2019, Morgan Stanley said, adding Brent oil could reach $67 per barrel at the end of June 2019.
Despite the OPEC+ announcement of lowering its production on Dec. 7, crude prices continued their decline over the following weeks.
On Dec. 26, Brent crude plummeted to as low as $49.93 per barrel, while American benchmark West Texas Intermediate fell to as low as $42.36 a barrel on Dec. 24.
- OPEC's options
If oil prices continue falling, OPEC and Russia could increase their compliance levels in the output cut deal during the first six months of 2019, and take out more supply from the market in order to boost prices.
However, if this fails to work and oil prices start falling again in the first half of 2019, OPEC+ could be forced to make another supply cut to boost prices.
This would again pave the way for U.S. shale to quickly fill the supply void in the global market.
OPEC and its allies announced on Dec. 7 that the participating countries to the oil cut agreement would meet again in Vienna in April 2019 in order to assess supply and demand in the global oil market.
"They’re [OPEC+] going to have to re-address this issue sometime next year, but I’m glad they’re meeting for their sake in April, and it may be by April they’re going to have to confront another cut," Morse told CNBC on Dec. 12.