Coronavirus outbreak tests shale before it tests OPEC

With four years of experience in reaching consensus among the members of the OPEC+ group of oil exporters, it is not hard to imagine that group extending or deepening such cuts to mitigate the impact of the coronavirus outbreak impact on the global economy.

This was clear during the extraordinary meeting of the OPEC Joint Technical Committee (JTC), which agreed to proceed with an additional adjustment taking into account that China is the world’s largest oil importer and has the second largest refining capacity in the world.

As always, global oil markets and the world depend completely on OPEC to fix any supply and demand turbulence. 

Though some analysts called for an earlier OPEC meeting ahead of March 5, it is more prudent to wait for the market to absorb the actual likely impact on global oil inventories before coming to an ultimate decision ahead of next month’s meeting.

Perhaps of more interest is whether US shale producers will survive the price slump after the WTI grade dipped to $50 per barrel. The coronavirus is helping to make 2020 a particularly tough year for shale producers.

They have failed to capture further market share through contractual volumes because their growth has not been sustainable.

In fact, average US crude oil exports for 2019 did not surpass 3 million bpd.

Neither have we seen US shale oil being able to compensate for any supply shortages as refiners only buy it on a spot basis with hefty discounts. 

Despite the expected increase in new pipeline capacity from the Permian Basin, the 2020 non-OPEC supply forecast remains subject to numerous uncertainties, including oil prices, investment discipline, hedging, cost inflation, unplanned outages, delayed start-ups and maintenance.

Even before WTI fell to $50 per barrel, US shale producers were cutting spending for the second year in a row as they responded to investor demand to maintain strict capital expenditure discipline. 

This has caused US oil production growth to slow down, and such growth will continue to slow, as investor demands for discipline persist. Thus, it is very questionable if US shale oil output growth will exceed one million barrels per day as forecast early by the Paris-based International Energy Agency.

US shale faces an extremely tough year, regardless of prices. Although the industry continues to evolve and remains extremely difficult to forecast, risks are now weighted to the downside.

The key mathematics of US shale oil growth have become more challenging, partly because of the rapid growth achieved in 2018. 

Decline rates for existing wells have risen, and production growth means that the month-to-month decline is applied across a higher base. 

As the active drilling rig count rapidly declines, it is impossible for US oil production to sustain an upward momentum. 

 

• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq