The success of North American shale drillers in cutting their production costs has reordered the oil market away from the traditional swing producers in the Middle East and seriously undermined their ability to affect prices.
The price of a barrel of West Texas Intermediate crude fell 1.82 percent today, closing on the Nymex at $47.34. It is down 12.2 percent this month and 14.3 percent since January despite last year’s agreement between the Organization of Petroleum Exporting Countries (OPEC) and 11 other producers led by Russia to cut 1.8 million barrels a day of output. OPEC nations have, according to Bloomberg, met their reduction quota while non-members have averaged 46 percent of their amount for January and February.
Production costs for American shale companies have plunged in the past three years making the vast U.S. and Canadian shale deposits profitable at a barrel price of below $40. Rystad Energy reported that the wellhead breakeven price has fallen from an average $80 to the mid-$30, with some fields even lower.
Shale fields have a much shorter time to market from initial drilling and producers can respond faster to changes in price. An analysis from Goldman gave U.S. shale fields a 6-9 month cycle from development to peak production compared with seven years for a large scale traditional oil field. North American shale is also situated in the center of the world's largest energy market with shorter and cheaper transport.
On Friday, Baker Hughes Inc. reported that the number of active U.S. drilling rigs had increased for the ninth week in a row, rising by 14 to 631 rigs. That is the largest number of operational rigs since September.
Earlier this month, the U.S. Energy Information Administration revised its production forecast for 2017 up to 9.2 million barrels a day and 9.7 million barrels in 2018.
Domestic U’S production had reached an all-time of 9.6 million barrels a day in June 2015 largely on the back of shale production. But as the price of a barrels of WIT dropped from over $100 in mid-2014 to $45 by early 2015 production began to decline as well touching 8.4 million barrels in July last year.
Production in the week ending March 10th was 9.1 million barrels, an 8.3 percent increase in just over four months.
Chief Market Strategist
WorldWideMarkets Online Trading
Charts: Thomson/Reuters; Bloomberg; Rystad Energy