LET'S TAKE A LOOK at what is happening in the US today with regard to oil supply and what is likely to happen in the next few years. In doing so, we'll rely on in-depth analysis from several well-respected organizations and individuals whose main focus is to analyze and report on current activity and future trends.
We'll start with Serkan Sahin, senior oil analyst at Thomson Reuters, who recently looked at what has happened so far in the Trump administration as it approaches his first 100 days in office. President Trump is widely seen as a supporter of the hydrocarbon industry, but nothing he has done so far has significantly impacted the oil market, which remains primarily driven by fundamentals, according to Sahin.
One of Trump's first actions as President was to sign an executive order to complete the first stage of the Dakota Access Pipeline, which had been stalled under President Obama. When completed, the pipeline will be able to transport about half of the Bakken's oil output from North Dakota to refineries in Illinois. Oil output from the Bakken has been constrained by lack of midstream infrastructure and takeaway capacity, and DAP is expected to have a positive impact on this situation.
It is still early in the Trump presidency, and the jury is still out as to what he may be able to accomplish to help the petroleum industry, which appears to be emerging from an extended economic downturn brought on by oversupply and low prices that occur as a result. The world is still in a situation where oil producers around the world are putting more oil on the market than can be absorbed, so at some point consumer demand will have to increase. Something will have to give to avoid yet another industry downturn.
Thomson Reuters Oil Research says it expects crude oil output in the Bakken to increase from about 964,000 bpd in April to roughly 1.07 million bpd by the end of the year - about an 11% improvement. Looking at all the major shale oil basins, the organization says it expects total US output to reach 9.14 million bpd by December - up 9% year-over-year.
Over in the Permian Basin, fast-growing oil output has also been overwhelming pipeline capacity. According to ESAI Energy, production of crude oil from the Permian will continue to outpace pipeline capacity in the region, keeping pressure on WTI Midland prices relative to WTI Houston. This constraint should be alleviated by the fourth quarter as new pipeline projects come online.
ESAI Energy estimates production from the Permian will grow over 420,000 bpd in 2017, and the acceleration in drilling activity will increase the basin's backlog of drilling but uncompleted wells (DUCs). Midstream companies have responded to the bottlenecks by expanding takeaway capacity. By the end of the year, four new pipeline projects are expected to add more than 800,000 bpd of capacity.
Elizabeth Murphy, an analyst at ESAI Energy, explains, "The price discount at Midland will ease as more crude makes its way to the Gulf. Permian production will continue to increase in 2018, but with more pipelines in the works, we do not anticipate the current constraint to last."
US crude oil production has been steadily rising in recent months with activity in the Permian Basin accounting for much of that increase. Even with OPEC cuts, global oil production has risen to the point that worldwide production in the first quarter of 2017 was 430,000 bpd more than could be absorbed by global markets. Storage is crammed to capacity by full inventories.
The question is who will cry "uncle" first - OPEC or North American shale producers, who have flooded oil markets with millions of barrels of crude oil from plays that were once considered uneconomic. When Saudi Arabia and its OPEC partners tried to strangle shale players in late 2014 by not cutting crude oil production, as they typically would do to bolster the price of oil, the intent was to punish shale producers and put many of them out of business so OPEC could preserve market share. However, the Saudis ended up punishing themselves as much as the shale players, and now the kingdom has gone through its discretionary cash reserves and built up significant debt. As a result, it's now more in their interest to keep prices up than to preserve market share.
Rystad Energy estimates that total US oil and condensate production has increased from 8.9 million to 9.3 million bpd between November 2016 and May 2017, the lion's share of which stems from higher shale activity. However, this is still below the 2015 peak of 9.6 million bpd.
Over the last year, investors have injected more than $100 billion into the US shale industry. Drilling activity has grown by 60% compared to 2016, while completion activity is up 30%.
"The OPEC cuts and subsequent oil price increase triggered renewed investment among US shale producers," says Espen Erlingsen, vice president of analysis at Rystad. "In fact, total investments in shale are expected to grow by approximately 50% this year. The spike in activity was first visible in increased rig counts, followed by higher completion activity. Now we are seeing growth in production again."
Shale companies were forced to improve efficiencies in order to survive and are producing crude oil, condensates, and natural gas at much lower costs than when they first started out. The lesson to be learned is never to underestimate the resiliency of the American oil and gas industry.
