Expected Uptick In U.S. Shale Oil Barrels Will Puncture Long Bets On Crude Futures

Expected Uptick In U.S. Shale Oil Barrels Will Puncture Long Bets On Crude Futures

Despite there being copious amounts of crude oil on the market and global inventories being well over the 2.7 billion barrel five-year average deemed as a balanced level, it is astonishing how many in the trading community continue to place long bets on the short to medium-term direction of West Texas Intermediate and Brent futures either side of the Atlantic.

I found none of that optimism at the oil industry’s triennial mega jamboree – the World Petroleum Congress (WPC) – which recently concluded in Istanbul, Turkey. In fact, the vibes that I caught suggested the great and good of the oil and gas industry were in the process of adjusting to a new normal on both the supply and demand side. I will touch on demand later, but first on to supply.

A plethora of physical traders I encountered in Istanbul say they have no problem whatsoever procuring crude oil, especially light sweet crude, at their desirable price points. Even India’s Oil Minister Dharmendra Pradhan, told me his country was importing its first ever consignment of U.S. conventional oil at a very competitive price and that American shale oil imports may yet follow.

You cannot understate the geopolitical significance of this development, even if it’s just a solitary consignment of crude oil from the U.S. to a market traditionally reliant on Middle Eastern crude.

Simply put, the U.S. is now firmly established as a medium-term buffer producer that the world’s third largest consumer of crude oil thinks it can also turn to. Furthermore, there was near unanimity at the WPC that U.S. production would end up somewhere around 10.3 million barrels per day (bpd).

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And there’s a reason for that. According to Fatih Birol, Executive Director of International Energy Agency (IEA), U.S. shale oil production is on an upward curve. “Compared to 2016, this year there has been a big decline in investment towards oil and gas projects. The only region that has actually seen a rise in investment has been American shale, where compared to 2016, investments are up 53%.”

That confirms hypotheses about relatively higher crude prices, courtesy of OPEC chatter earlier in the year, helping U.S. shale players hedge to a level deemed to be $45 that will keep them in the game for at least another 12 to 18 months out.

Birol even suggested that it was no longer appropriate to brand the IEA itself as an ‘energy consumers’ think-tank’ since some of its members – led by the U.S., and others such as Canada and the U.K. – were adding to the global supply pool while oil cartel OPEC was in fact cutting production.

Technology is also a great leveler. The tenacity of U.S. independents has ensured some with viable onstream oil plays can keep pumping even at $30 per barrel. Now the oil majors are making it their mission to do so too. Bob Dudley, chief executive of BP, told me at the WPC that the period of $100-plus oil prices from 2011 to 2014 was an aberration and that the oil giant is working towards a $30 break-even as early as 2021.

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