Video: Oil Markets Remain Oversupplied Despite OPEC cut (TV)
U.S. drillers have now added rigs for 19 straight weeks, to 722, the highest amount since April 2015. Almost all of the recent U.S. output increases (10% since mid-2016 to over 9.3 million bopd, close to top producer levels Russia and Saudi Arabia) have been onshore, from shale oilfields. Even if the rig count did not rise further, Goldman Sachs said it estimates that U.S. oil production “would increase by 785,000 bopd between 4Q16 and 4Q17 across the Permian, Eagle Ford, Bakken and Niobrara shale plays.” (Reuters)
As we explained here, The OPEC meeting has failed, again. The decision to cut production was announced months ago as a great triumph because it included countries outside the organization. And it was a mistake. The result, several months after the largest production cut in history, could not be further from what the organization expected. Oil inventories in the OECD rose to five-year highs, the United States also recorded record levels of crude oil in storage despite a healthy demand, growing by more than a million barrels a day in annualized terms. However, oil prices remained far below those levels desired by OPEC, and especially its more wasteful members, Venezuela in particular.
Why? OPEC has underestimated the reaction of new technologies and independent producers. The cut by OPEC has been the biggest gift to shale in a long time. The US achieved a production growth that has surprised the most optimistic, and the country is closer to energy independence. That the US imports less and stores more, affects oil prices in several ways. On the one hand, US producers have done their homework and increased their efficiency and reduced costs by more than 40%, which has allowed them to be competitive at $45 a barrel. This makes the price of oil lose strength in the face of evidence that the market is better supplied and more diversified than expected.
There is another very important effect. The “oil weapon” mentioned by Chavez years ago has run out of gunpowder. With the drastic reduction of US oil imports, the geopolitical premium historically added to the price of oil due to the US dependence on politically unstable countries, disappears.
Evidence from recent years shows us that the success of the American energy revolution, carried out without any support from the Obama Administration, is twofold. The dream of energy independence of the world’s largest energy consumer is ever closer, and the combination of shale, renewables, coal and natural gas, has been an essential factor in competitiveness, growth, employment and has destroyed the power of OPEC to manipulate the price of oil.
Daniel Lacalle has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)