With Predictions of $80/bbl crude by Christmas, Shale is "Off to the Races" at Just $60/bbl

Friday November 10, 2017

Crude prices hovering near two year highs have triggered a host of optimistic forecasts for a commodity that just last week was widely considered to be range-bound, but none so optimistic than the contention on Friday that Brent could reach $80 per barrel before Christmas.

Bloomberg reports that 48,000 contracts have traded over the last few days that would profit most if Brent spikes before Christmas, including several large individual trades: "They include 14,000 options giving traders the right to buy February Brent at $71 a barrel, as well as 22,000 for $85 and 12,000 for $80; they all expire on December 21."

While $80 seems unlikely, the current market surge is more than enough to encourage predictable activity, according to Ben Shattuck, principal analyst for Wood Mackenzie, who told Bloomberg that $60 oil means "U.S. shale is off to the races in terms of production" with an additional rig count of 80 by the end of this year.

But he added that there are long terms (within the next decade) risks, including geological challenges as American producers try to achieve a 10 million barrel per day (bpd) rate: he said new wells will inevitably be drilled close to old ones, and this will result in a decline in productivity by as much as 30 percent.

He added that oil prices of $5-$10 per barrel higher than the current rate would be needed to offset those risks.

There is also the emerging issue of crude quality that could well compromise the gains crude could make in the foreseeable future: Sebastien Bariller, senior vice president of feedstock purchasing at Hanwha Total Petrochemical Co. (a South Korean joint venture of Total), reported that some condensate from U.S. shale fields is too dirty to justify the ultra-light oil's price in Asia compared with supply from the Middle East.

Specifically, a cargo of Eagle Ford grade Bariller's company bought had 83 parts per million of nitrogen compared with 7ppm found in Qatar's Deodorized Field Condensate.

Frederic Lasserre, director of market analysis at Total, said U.S. producers need to "send a lower price signal'' to encourage investments in upgrading Asian plants, since the supplies are supposedly being tainted when pumped through pipelines en route to storage; he added that "Certainly, U.S. producers aren't going to discount the material.

"What's going to happen is that U.S. producers are going to clean it out; they're going to invest in pipelines and tankage and facilities to be able to bring the clean material that you'd like to see, rather than that dirty stuff you're seeing so far.''

Wells Fargo Investment Institute is one organization that is not swayed by the current crude price surge: earlier this month it warned that historical market trends dictate a bear market will persist for another 10 years, with West Texas Intermediate stuck between $30 and $60 per barrel.