U.S. shale might find it hard to fill the oil market production gap

 (Photo: Unsplash)

(Photo: Unsplash)

In the world of petroeconomics, it is not surprising to see Venezuela facing a downturn in its oil production - the writing has always been on the wall. As the political climate gradually worsens in the communist state, the global oil production from the OPEC countries is going down at a much faster rate than previously forecasted. Crude oil production in Venezuela has fallen by over 25% since September 2017, and is falling by more than 50,000 barrels per day (bpd).

Iran, another prominent OPEC member, is on the verge of being hit by U.S. sanctions after Trump pulled out of the nuclear deal, which analysts believe could add on to the woes of the oil industry. To balance the scales, Russia upped its production to 11.09 million barrels per day (mbpd) - a full 143,000 bpd higher than its production share as per the OPEC+ deal.

Russian oil companies are firm on increasing output to match the dropping levels across the OPEC, looking to douse the demand rather than watch the price soar. This comes in the wake of its meeting with the other OPEC members on June 22, which is expected to decide on the production cut deal between the nations.

On the other end of the spectrum, U.S. shale oil production is growing at a furious pace and is expected to follow the trend into 2019. The International Energy Agency (IEA) released a new report pegging the growth in oil demand across the world at 1.4 mbpd, unchanged from its last month forecast. On the supply side, the IEA projects a growth of 2 mbpd in 2018 and a further 1.7 mbpd in 2019, of which 75% is attributed to the shale oil production in the U.S.

But the U.S. shale production is not free of complexities. The U.S. shale produces WTI crude, a light crude oil which is considered ‘sweeter’ than its Brent crude counterpart due to its lesser sulfur content. The value of WTI crude against Brent crude has oscillated over the decades. Though largely staying close to the Brent crude value, the WTI crude price dipped between 2011-2015 when the spread was great as the price of Brent crude soared.

Now, the WTI price is about $10 less per barrel compared to Brent crude. The oil price is even lesser in Texas, where most of the oil is being drilled out. One of the primary issues with the growth in shale production is the inability to move all the oil out from ground zero to Cushing or the Gulf Coast, the oil trading hubs of the country. The Permian Basin in Texas and New Mexico leads the shale operations in the U.S., with its production nearly triple that of the second highest basin at Eagle Ford, and adding 80,000 barrels a day.

This has led to a dearth in pipeline facilities, as the fast-growing production rate would soon trump the available pipeline capacity, leading to a bottleneck. Unless this situation eases, oil producers would have to sell their oil at a much-reduced rate to the WTI benchmark, as the oil has no way of leaving the basin to Cushing or the Gulf Coast oil hubs.

The current capacity of the pipeline in the Permian basin is 3.1 mbpd which is soon to be breached, as estimates show that the basin would be producing 3.277 mbpd by the end of this month. This has led to a situation where Midland WTI crude sells at $19 a barrel below Brent crude.

Coming back to the topic of stricken nations, the IEA believes it could lose out on 1.5 mbpd in supply from Iran and Venezuela by the end of 2019 and hopes U.S. shale coupled with an increase in production in Russia and Saudi Arabia would help with the rising market demand.

The uncertainties surrounding oil production has had that the market tighten considerably over the last year. Estimates from OPEC on the commercial oil inventory surplus in OECD countries stand at 43 million barrels above the 5-year average, nearly 90% down from what it was a year ago. As the inventory glut diminishes and the value of the U.S. dollar strengthens, the oil production levels may have a greater bearing on the oil price now than it had a year back.

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