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U.S. Shale, OPEC Vie for Oil SupremacyMcFarlane, Sarah; Minczeski, Pat. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]19 Apr 2019: B.12. Two sets of oil producers are fighting for dominance: the growing U.S. shale patch and the Organization of the Petroleum Exporting Countries. Investors are trying to figure out which side has the stronger hand. Oil prices are near 2019 highs, which could give the impression that OPEC, with its production cuts, is the current dominant force. But output from U.S. shale-oil producers has doubled from its level five years ago, and more supply coming later in the year could flood markets yet again. Gordon Gray, head of oil and gas research at HSBC, calls the OPEC vs. American producers a "tug of war." OPEC's aim is to prevent inventory buildup and keep prices at a higher level to balance its members' government budgets. OPEC and its allies, including Russia, agreed to cut output by a collective 1.2 million barrels a day for six months starting in January, helping prices to rise by a third this year to above $70 a barrel. It isn't clear whether the group will agree to extend the deal. But don't count shale out. With three new U.S. pipelines set to open this year that will connect oil wells with the Gulf Coast, U.S. oil shipments should surge in the year's second half. "It's much more short cycle and responsive to price than the vast majority of global production," said Mr. Gray. OPEC and shale, plus a weakening global economic outlook, sparked a volatile stretch for oil prices starting late last year. That volatility has now diminished, as the cartel has shown that, so far, it is sticking to its guns on production cuts, which is helping support higher oil prices. When prices rise, volatility tends to dissipate. "There's a certain element of confidence that this rally has further to go," said Harry Tchilinguirian, global head of commodity-markets strategy for BNP Paribas. Inventories are key in knowing who is winning the battle for oil prices. When they are high, the world is flush with excess oil, which depresses prices. A bump above the long-term average would be bad for oil prices. Whether OPEC members hold the line on production cuts will depend greatly on their individual financial circumstances. For instance, this year Saudi Arabia needs oil prices to average above $73 a barrel to balance its budget, according to the International Monetary Fund. "The U.S. oil price needed for shale oil to be profitable is around $53 a barrel or above," said Roy Martin, an analyst at consulting firm Wood Mackenzie. "OPEC countries have shown that they have a lower survival rate than U.S. producers at very low prices," said Olivier Jakob, managing director of consulting firm Petromatrix, referring to the ability of national governments to balance their budgets when oil prices drop. The EIA expects the U.S. to become a net exporter of energy by 2020, cementing the transformation shale has created. "The second wave of the U.S. shale revolution is coming," said Fatih Birol, executive director of the IEA, at the launch of its Oil 2019 report in March. He added the U.S. will account for 70% of the total increase in global production capacity over the next five years. This surging production may not be sustainable, however, with more than a dozen shale companies announcing spending cuts this year as they grapple with paying more than most other sectors to borrow money. Some small- and medium-size U.S. energy producers that borrow in the high-yield debt market are paying around 7 percentage points above Treasurys, according to ICE BofAML indexes. Credit: By Sarah McFarlane and Pat Minczeski |
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