In November 2017, the crude oil production of the United States exceeded 10 million barrels a day[1]. The US should be the largest crude producer in the world, according to the latest report from the International Energy Agency (IEA), which said that “this year (2018) promises to be a record-setting one for the US,” with the potential of surpassing the output of Saudi Arabia and Russia[2].
The rapid increase in US production is due in large part to its booming shale industry. The IEA’s report suggests that U.S. crude production could exceed 10 million barrels a day this year, raising its outlook by 260,000 barrels a day.
This is a result of rising Crude prices, thanks to the OPEC reducing production, pushing up the crude prices. Figure 1 below shows how the rigs in the US have been experiencing a steady rise, with almost a 50% increase in their count in just one year[3]. Also shown in the chart are the crude oil futures which have topped off at $75 and are showing a downward trend through 2019 and 2020[4].
More oil from the US?
As more rigs come online, the United States would more than offset the loss of 1 million barrels per day (some put it much lower) of crude coming from Iran into the market. This was the primary trigger for the rise in Crude futures. Then the derivatives market took over and hyped it up. Economies like Russia, Saudi Arabia and Venezuela are all based on their oil revenues and it is a matter of time before one of them capitulates and starts over-producing and then there will be a bloodbath in the market.
Fracking costs have reduced dramatically
One thing that the US does not stop doing – innovation. Fracking operations have been cut dramatically due to innovations and efficiencies and the slump of 2014, forcing dozens of Shale producing companies into bankruptcy is a thing of the past. It must be kept in mind that the average life of shale well is only 10 years as opposed to say an oil well in Saudi Arabia (50). But with many countries weaning themselves off fossil fuels, the demand will decline steadily.
How low can Crude go?
In August 2017, the break-even price for a shale company was $50 per barrel. In April, it is down to $44, a 12% decline[5]. And there are at least 30 new projects coming on stream this year. So in order for OPEC to keep the US from producing more, it needs to bring the price down to the low 30s, which actually hurts countries like Saudi Arabia a lot. The Saudis feel that $75 a barrel is a good price for them.
In 2016, with the imminent re-entry of Iran as an oil producer, I had written that the crude could go as low as $20 per barrel[6]. For a day or two, it hit $28.
Saudi Arabia’s Royals
There are about 15,000 princes and princesses who belong to the Royal house of Saud[7]. This must be costing their exchequer plenty. Many more may have been born (this number was as of 4 years ago) and it is only a matter of time before the ruling clique is going to turn the tap off. The Saudis will have to continue to cut subsidies in order to stay within their revenue stream. Plus the war in Yemen. It is not inconceivable for the Saudis to themselves break the OPEC agreement and start producing more than their quota.
Will Iran fight back?
What about Iran? Will it sit back quietly and try to get back into the good books of the US (primarily Trump)? Or will it sweeten the pie with India and agree to give a market rate discount of say 30% (which is what Venezuela is rumored to be doing) and accept part payment in rupees? Trump mentioned that India wants to make a deal with the US. Will US accept rupees for their crude? If not, will India insist on continuing its arrangement with Iran? So suddenly, India is in a good spot – it can, with a deft negotiator get the best deal for all the stakeholders. We will wait and watch.
References:
[1] Oil’s Boom-and-Bust Cycle May Be Over. Here’s Why – Mar 1, 2018, Harvard Business Review
[2] This Country Could Pass Saudi Arabia to Become the World’s Largest Oil Producer in 2018 – Jan 19 ,2018, Fortune
[3] US Rig Count data – Sep 2018, AOGR.com
[4] Oil prices are heading lower this year and even lower in 2019, JP Morgan forecasts – Jun 8, 2018, CNBC.com
[5] 2018 Oil & Gas Projects To Break Even at $44 Per Barrel – Apr 5, 2018, OilPrice.com
[6] How low will Oil go? Jan 12, 2016, PGurus.com
[7] The Palace coop – May 14, 2014, The Economist
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Mr. Iyer, your analysis is at variance from other sources like livemint who are predicting $100/barrel – it will be useful if you can contrast your approach with theirs and show why their forecasts may be off the mark this time. I can see the rationality in your analysis but perhaps some other factors are playing a role (maybe politics) in jacking up the rates?
The terror funding will decline and as a result we might see peace in different parts of the globe.
Saudi Arabia is in a fix , in case crude price drop below US $ 40 , they will become Bankrupt .
The cost to extract crude is US $ 8 – 12 + there commitment of US $ 18 – 22 to spread Islam worldwide .
Shale oil is shaking Middle East Islamic countries and hold over global Economy. They rigged manipulated crude prices upto now , story coming to end !!!