Saudi Arabia Plays Chicken With U.S. Shale
“Drill, baby, drill is gone forever.” That’s the view expressed by Saudi energy minister Prince Abdulaziz Bin Salman after last week’s meeting of the alliance of oil producers known as OPEC+.
The prince, who enjoys surprising the oil market, was riding
high. He had just encouraged and cajoled his colleagues into accepting, for
another month, his careful approach to adding back the supply they took
off the market last May. He urged
caution from the get-go, offering the view that demand recovery will remain
fragile until Covid vaccine campaigns are much further along.
Not only did the OPEC+ group as a whole agree to defer an
easing of their production targets — Russia and Kazakhstan were granted small
increases, apparently to meet a seasonal uptick in demand — Saudi Arabia also
extended its additional voluntary cut for another month. It will now run to at
least the end of April and then only be restored in stages.
The oil market had been expecting as much as 1.5 million
barrels a day of production to be restored in April. It got just one tenth of
that, and Brent crude promptly jumped toward $70 a barrel, a level not seen
since May 2019.
What was striking is that Prince Abdulaziz is clearly
concerned oil consumption may not evolve along the lines foreseen by OPEC’s own
analysts. He would rather tighten the oil market than risk another collapse.
And even with oil prices back at pre-pandemic levels he’s still confident they
won’t spur a third shale boom.
He may well be right.
As I argued here and here, the second shale boom was already
coming to an end several months before the Covid-19 pandemic struck and
producers capitulated in the face of the price collapse that followed hard on
the heels of the virus.
Oil production from seven major shale regions tumbled by 2.4
million barrels a day, or more than a quarter, in the six months from November
2019 to May 2020. Oil prices only began to fall in January 2020, with the slide
not gathering momentum until March, so the slump in production wasn’t initiated
by lower prices.
Going into the meeting, it wasn’t clear the Saudi prince
could convince his fellow OPEC+ oil ministers that the threat of a resurgent
shale sector has vanished. His Russian counterpart Alexander Novak warned back
in December that a “price range of $45 to $55 a barrel is the most optimal,”
for the group to start opening its taps. “Otherwise we’ll never restore
production, others will restore it.”
The Saudis are willing to gamble that Novak’s wrong, even
with oil prices at $65 to $75 a barrel and likely to move higher.
Drilling activity and well completions in seven major shale
regions have picked up a little from their low points of last summer, but
aren’t yet back even to the lows experienced between the first and second shale
booms (see chart above). Companies operating in the shale patch have been
forced by investors and lenders alike to pull back from their earlier
growth-at-all-cost strategies to ones that return profits to shareholders and
pay down debt.
Shale companies “have had their fair share of adventure and
now they are listening to the call of their shareholders,” Prince Abdulaziz
told my Bloomberg News colleagues after Thursday’s meeting.
Companies from Exxon Mobil Corp. on down have been scaling
back production plans for their shale assets. The U.S. major has cut its 2025
output target for its Permian Basin operations by 30% to 700,000 barrels a day
and slashed the number of rigs it is using there to 10, down from 55 before the
pandemic.
But the higher prices go, and the longer they stay there,
the more likely it is that calculation could change. Especially given that
shale producers may now be in a position to lock in prices for future output
that are high enough both to generate profit and increase production. Brent
crude is already trading above $60 a barrel all the way out to the end of next
year, giving companies plenty of scope to hedge production at a profit.
Prince Abdulaziz is hoping that by the time they get the
bits turning and new wells pumping, the demand recovery will be secure enough
for him and his allies to open their own taps. In the meantime, his only
consolation for those customers, such as India, who want more of his oil was to
tell them to draw down some of the stockpiles they built up so cheaply last
year.
Comments
Post a Comment