Opec agreement to cut oil output gives US shale producers a lifeline
THE US shale industry, gutted by two and a half years of bankruptcies, writedowns, credit downgrades and layoffs, is set to step back from the brink, thanks to an old enemy: Opec.
Abandoning a policy that sought to starve shale explorers and other high-cost drillers into submission, the oil cartel relented on Wednesday and agreed to curb output by 1.2 million barrels a day. Other producing nations that were not cartel members also signalled plans to cut back up to 600 000 barrels, Opec said.
The deal could boost prices through at least the first half of next year, according to Chris Kettenmann, the chief energy strategist at Macro Risk Advisors. The result: US shale fields could raise the amount of crude produced within four months, said Antoine Halff at Columbia University’s Center on Global Energy Policy. First to pounce should be drillers in the Permian Basin of Texas and New Mexico, home to gushers prolific enough to spur a recent land rush.
If the deal holds, “US oil production growth is all but guaranteed to return in 2017,” said Joseph Triepke, the founder of Infill Thinking, an oil research. “All US tight-oil plays will benefit, but none more than the Permian, where we estimate as many as 150 rigs could be reactivated next year.”
Crude prices soared as much as 10 percent in New York after the Opec deal and investors pushed energy stocks into the top 18 spots on the S&P 500 index, swelling the US oil industry’s market value by $81.3 billion (R1.14 trillion).
Some of the best performers were those hardest hit by the downturn that began in mid-2014 and accelerated five months later when Opec declined to cut output. California Resources jumped by 44 percent, while Halliburton, an oilfield-services company, rose as much as 15 percent, its biggest
This is real and it is significant. Even if they don’t deliver the full 1.2 million-barrel cut, it accelerates the inventory drawdown.
intraday rise since 2008.
Oilfield servicers that provide everything from $700 million floating rigs to the sand used by frackers have contributed the largest chunk of more than 350 000 oil-industry layoffs globally during the twoyear downturn. More than 100 oil-service companies in North America have gone bankrupt.
Shale pioneer Harold Hamm, an energy adviser to president-elect Donald Trump, predicted as far back as 2014 that Opec would crack before the shale drillers. On Wednesday, Hamm found himself $3.1bn richer as Continental Resources, the company he leads, soared 23 percent as his prediction came true.
“This is real and it is significant,” said Andrew Slaughter, the executive director of Deloitte’s Deloitte Center for Energy Solutions in Houston and a former Royal Dutch Shell executive. “Even if they don’t deliver the full 1.2 million-barrel cut, it accelerates the inventory drawdown.”
Over the next few months, drillers will probably take advantage of the price bump, moving to lock in profits on future production with financial hedges, according to Halff, the director of global oil-markets research at Columbia and a former chief oil analyst at the International Energy Agency.
Not everyone sees only upside. Natural-gas producers might be victimised, said Jason Schenker, the president of Prestige Economics in Austin, Texas. As oil drilling ramps up, more gas will flow out of the ground along with it, he said, threatening to derail a rally that pushed US prices for the furnace and factory fuel to a two-year high.
“These guys will drill more, and you are going to get that extra gas at an inconvenient time,” Schenker said. “It’s bearish for US gas for the next three- to nine-month window.”
Other analysts said Opec might have a deeper motive, pushing a bump now but looking to drive down the future price of oil. That would hinder shale producers from getting financing for drilling based on the prospect of rising prices, said Michael Roomberg, who helps manage $7.5bn at Miller Howard Investments.
“The six-month term of the deal seems like a clever strategy designed to limit upside in the forward curve which will inhibit some market-share gains by US shale while at the same time increasing current Opec revenue,” Roomberg wrote in an e-mail.
Others preached caution. Investors should avoid “sharp recovery hype”, Stephens analyst Matt Marietta told clients in a research note on Wednesday.
The strength of the deal will also depend on whether all parties deliver on their commitment. Saudi Arabia and its Gulf allies have traditionally stuck to their cuts, but some others haven’t, particularly when prices are low.