US Shale Will Rebound in 2017: Analysts

Tuesday December 6, 2016

Last week's surprise ratification of the Organization of the Petroleum Exporting Countries' (OPEC) production cutback deal has not only galvanized the market, it is causing observers to predict that 2017 will be the year U.S. shale truly comes into its own.

Alejandro Barbajosa, VP, crude & LPG - Middle East & Asia-Pacific at Argus Media, told CNBC that "next year we will see a rebound in U.S. production of maybe about 500,000 barrels per day [bpd], with prices close to $60 per barrel."

He added, "Of course this takes away a bit of the effort that OPEC has done, but those OPEC cuts are still quite meaningful, especially in the first half of next year, in taking away some of that stockpile accumulation that has been taking place over the last two years."

Barbajosa didn't elaborate on the potential for increased U.S. production, but that topic was very much on the mind of Myra Saefong, markets/commodities reporter for MarketWatch, who this week wrote, "So far, the oil market has cheered the [OPEC] agreement, but the true winner may be the U.S. shale-oil industry."

She went on to quote Charles Perry, chief executive officer of energy-consulting firm Perry Management, as saying, "Shale drillers have good backlogs of undrilled but proven leases, and they can get rigs and other equipment quickly.

"So even if OPEC cuts production for a limited period of time, the shale drillers can quickly jump in and drill some new wells."

Michael Roomberg, a portfolio manager at Miller/Howard Investments, was quoted as saying that because shale wells naturally become less productive over time, "that decline must be constantly offset by new well drilling, otherwise overall basin supply will decline."

John Hulsman, senior columnist at City AM, frames the situation more dramatically: the OPEC deal, he wrote on December 5,  "amounts to nothing less than Saudi Arabia's surrender to the power of American shale.

"The Saudis, having utterly lost the plot, are now – as the problems inherent in this deal make all too clear – trapped in a world where they no longer control the global energy scene… seems even the surrender terms the Opec deal represents will not be accepted by Riyadh's competitors - and they have no one to blame for this state of affairs but themselves."

Meanwhile, U.S. shale companies are making headlines for their market influence, with Ben Freeman, founder of HudsonField LLCtelling Bloomberg they are using the post-OPEC rally to hedge their oil price risk for next year and 2018 above $50 a barrel: "We are going to see a significant amount of producer hedging at this level."

Bloomberg describes the effect of this rush to hedge as "turning the oil markets upside down."

As for the efficacy of the OPEC deal itself, Barbajosa said, "There's always concern that OPEC won't come through with the cuts that it has agreed to, but I think the experience of what they've done in the past shows that at least half of the agreed cut…will actually materialize.

"Why? Because Saudi Arabia has always respected and abided by any cuts in production, and so have the United Arab Emirates and Kuwait, who have important cuts as part of that total OPEC cut."

Barbajosa believes "at least" 600,000 to 700,000 bpd will come off the market as a result, "and add to that any potential discipline we'll see from not so disciplined members."

Not every analyst thinks the U.S. is the main victor of the OPEC deal: last week, John Kilduff, founding partner of Again Capital, told CNBC, "The Saudis really pulled off a victory for themselves ... I think that the most recent sell-off in crude oil scared them all into this; I think they saw what lay ahead if they didn't do this."