Shale Oil in 2017: A Reflex Test – 1/5/17

After pulling off its biggest deal in a decade, OPEC faces a new balancing act in 2017: boosting prices without jump starting the U.S. shale patch.

The shale boom created a global supply glut that sent oil prices plummeting in mid-2014, a trend only amplified by a OPEC strategy favoring market share preservation over price controls. During the rout, oil prices fell from more than $100 a barrel to as low as $26, straining the budgets of companies and countries to the breaking point.

With the new cuts, prices could average $58 a barrel in 2017, according analyst estimates compiled by Bloomberg. While that gain will aid OPEC members in desperate need of revenue, it could also spur a revival in U.S. drilling.

Everyone is watching to see how quickly U.S. shale will rebound. Estimates vary on possible additions this year, ranging from 500,000 b/d to 1 million b/d, but everyone agrees that U.S. shale will add production in 2017.

U.S. drillers who survived the rout by becoming leaner and more efficient are a constant threat to the efficacy of the OPEC deal. At 8.8 million barrels a day, the U.S. is already pumping near 2014 levels, using only a third of the rigs, according to data from Baker Hughes Inc. and the U.S. EIA. And, even now, there are signs that U.S. shale is ready for comeback despite prices stabilizing at around $50 a barrel. Since May, about 200 rigs have been added in U.S. shale patches with more expected.

Should prices pass $60, it could mean a million-barrel shale surge from the U.S., Macquarie Research analysts Vikas Dwivedi and Walt Chancellor noted in a Dec. 12 report. A Citigroup Inc. analysis also projects that if oil passes $70 a barrel, the U.S. could start pumping out an extra million barrels a day. Either case would completely overwhelm the OPEC cuts.

The issue for the oil industry now isn’t whether U.S. drillers will expand their operations, but rather “how quickly does shale come on to tap those higher prices, and then how quickly they push them back down,” said Peter Pulikkan, a Bloomberg Intelligence analyst in New York. “2017 is the year where you are going to see shale’s reflexes tested.” I couldn’t agree more.

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