US shale producers and OPEC ready to talk

(May 26)After a bruising recent fight, now ended, in which Saudi Arabia pumped more and more oil to drive shale producers out of business, US oil shale bankers came to Vienna this week and top OPEC oil officials are planning a trip to Texas.

The US shale producers are trying to see if they can co-exist or if they will begin another major fight in the near future. US shale oil production has increased supply as OPEC along with a number of OPEC countries have cut production to raise prices. Khalid al-Falih the Saudi Arabian energy minister said that the OPEC and the US shale producers had to learn to coexist. Al-Falih reversed Saudi policy last December pushing through production cuts. On Thursday OPEC and several non-OPEC countries led by Russia agreed to extend the cuts a further nine months to March 2018. This keeps roughly 2 percent of world production off the market.

However, these supply cuts combined with higher prices enable the shale industry to gain higher profits. The Saudi squeeze had made the industry search successfully for ways to reduce costs to survive. In the largest US oil field the Permian Basin, Parsley Energy (PEN), Diamondback Energy (FANG.O) and others are pumping faster than they have in years, as they take advantage of new technology, lower costs, and the steadier oil prices caused by OPEC actions.

OPEC recognizes the global effect of shale production but has decided to keep just enough oil on the market to keep prices below $60 dollars per barrel. Noureddine Boutarfa who represented Algeria at the Vienna meeting said: "All shale companies in the U.S. are small companies. The reality is that at $50 to $60 a barrel, (the U.S. oil industry) can't break beyond 10 million barrels per day." This would be a one million bpd increase after a two-year price war with OPEC that saw scores of bankruptcies and layoffs. OPEC hopes that this increase will not be sufficient to offset rising demand. The increased production will also be offset by declines in production in traditional oil fields.

Iran's oil minister, Bijan Zanganeh, showed some optimism in the situation:"For all OPEC members, $55 (per barrel) and a maximum of $60 is the goal at this stage. So is that price level not high enough to encourage too much shale? It seems it is good for both."

At previous meeting there was reluctance to talk about shale production but not this year. Carlos Perez, oil minister of Ecuador said:: "We had a discussion on (shale) and how much that has an impact. But we have no control over what the U.S. does and it's up to them to decide to continue or not." Mark Papa, chief executive of Permian oil producer Centennial Resource Development was asked by OPEC delegates to give a presentation on shale oil's potential production but apparently did not indicate exactly what OPEC could expect.

Some in OPEC are skeptical about the potential for further oil extraction. Dave Purcell of Tudor, Pickerig Holt and Co a US shale investment bank who attended the meeting said: "OPEC looks at shale and it scoffs. There's a rational skepticism globally, but it misses the mark." OPEC will meet again in November to evaluate output policy. Most members appear to accept that the US shale industry must be accommodated but others still see another market battle in the future. Nigerian Oil Minister, Emmanuel Kachikwu said: "If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do."

The OPEC cuts have pushed oil prices back above 50 dollars a barrel although as I write this it is now marginally below 50 dollars. It has helped some producers who rely heavily on oil revenues. The decline started back in 2014. However, it is also helping US oil producers which are not part of the agreement. This slows down the OPEC attempts to balance the market. Global oil supplies are still near record highs. Trump's budget proposal to sell have the US strategic reserves over ten years also is a threat to attempts to reduce excess supply.

Many had been hoping that OPEC would make even deeper cuts and oil prices dropped at first with the announcement of the further nine months extension of the present cuts. As BNN reports: "Oil prices edged back up on Friday after a five per cent fall in the previous session on disappointment that an OPEC-led decision to extend current production curbs did not go deeper." Saudi Arabia's Al-Falih noted that there were suggestions that there should be deeper cuts but that this would not be necessary. Libya and Nigeria were excluded from the cuts because of unrest that curbed their production. He also said that Saudi Arabia's exports would decline sharply from June on, helping to speed up rebalancing of the market. OPEC's goal is to bring oil stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion.

Al-Falih said: "We have seen a substantial drawdown in inventories that will be accelerated. Then, the fourth quarter will get us to where we want." OPEC does not want the price higher than $60 dollars a barrel as this could result in a substantial increase in US shale production. The US now rivals Saudi Arabia and Russia as one of the world's largest producers. Al Jazeera reporter, Sonia Gallego, reporting from Vienna, said: "although [US shale production] has evolved from what it was years ago - it has had to cut back and reinvent itself - the Saudis have maintained that that level of production is not going to affect OPEC." US oil production also may find itself contracting as reserves dwindle and also through reaction to the negative consequences for the environment and health arising from fracking