With shale under control, Saudi Arabia and Russia become more comfortable with oil rally


A sticker shows crude oil on the side of a storage tank in the Permian Basin in Mentone, Loving County, Texas, USA, November 22, 2019. REUTERS / Angus Mordant / File Photo

  • OPEC + has pushed back US calls for faster production increases
  • Russian source claims OPEC + is not concerned about US production
  • OPEC + source says shale oil problem hasn’t arisen for months
  • OPEC + meets on November 4 and is expected to stick to its previous plan

LONDON / MOSCOW, Nov 3 (Reuters) – Saudi Arabia and Russia are more convinced that higher oil prices will not lead to a swift response from the U.S. shale industry, OPEC + sources have said , reflecting a desire to replenish income and supporting the case against increasing OPEC + production faster.

The two countries lead the OPEC + group of the Organization of the Petroleum Exporting and Allied Countries. The OPEC + supply restriction supported a rally that pushed global benchmark Brent crude to a three-year high of $ 86.70 last month.

Signs that Riyadh and Moscow are less wary of higher prices help explain why OPEC + has pushed back calls from the United States and other consumers for a quicker unwinding of production cuts made last year at its worst. the pandemic.

“OPEC + keeps an eye on US oil production and reserves and the alliance has no concerns about it at the moment,” a Russian OPEC + source said. “US shale oil production is recovering relatively modestly.”

All oil producers suffered a drop in their income during the pandemic and the rise in prices allowed them to rebuild their balance sheets.

U.S. shale companies were under pressure even before the pandemic to cut spending and expansion and increase returns for shareholders. This pressure has kept them in check even as oil prices hit levels that would previously have sparked a boom in shale oil drilling.

The trend appears to have allayed OPEC + fears that higher prices would drive up shale production in the United States, making them more comfortable with the rally.

Russia often feared that if OPEC did not increase production and control prices, it would encourage more shale drilling. Russian officials have not shown any such concerns recently, according to OPEC + sources.

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“There is no doubt that the Saudis and Russians have upped their price aspirations. They started the year with an unofficial goal of $ 75 Brent, but feel more comfortable with a hike,” Gary said. Ross, CEO of Black Gold Investors and OPEC veteran. observer.

“The reasons could be a combination of needs, policy and the market’s ability to handle it, as shale is a less dominant feature with apparent discipline of capital,” Ross added.

OPEC forecasts predict no growth in US shale production in 2021 and a modest increase of around 400,000 bpd in 2022, although internal forecasts seen by Reuters suggest the figure of 2022 will be revised upwards.

“The question of shale oil has not arisen for several months, neither for the ministers nor at the technical level,” said an OPEC + source.

Investors have punished U.S. shale companies that have tried to increase their spending on drilling for the past two years – by eliminating stocks of companies that haven’t cut budgets and are aiming for stable oil production.

U.S. shale operators have moved away from remote areas where the equilibrium cost is higher than in the Permian Basin, America’s largest shale game, based in Texas and New Mexico.

Permian production peaked in March 2020 at 4.91 million barrels per day; it is expected to hit 4.89 million bpd in November, just 0.5% below that peak, according to figures from the US Department of Energy.

The rest of the shale basins in the United States, by contrast, are expected to produce a total of 3.3 million b / d in November, down 27% from a peak of 4.5 million b / d reached. in February 2020.

The rapid growth in the supply of unconventional shale oil has caused problems for OPEC in the recent past.

The increase in shale production, encouraged by OPEC’s supply reduction policy to support prices, helped create a glut in 2014-2016. This glut ultimately led to the creation of OPEC +, which began restricting production in 2017.

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With shale production considered unlikely to rebound for now, OPEC + was able to avoid any action to cushion the price hike.

OPEC + at its October 4 meeting was under pressure from the United States to do more to cool the market. The group, sources said, had options to increase production by 800,000 bpd and 400,000 bpd as its plan called for. Read more

Saudi Arabia has made it clear that it is against adding more than 400,000 bpd, and Russia, which earlier this year was pushing for faster increases in OPEC + production, did is not opposed to it, OPEC + sources said.

At its last meeting, to be held on November 4, OPEC + is also expected to stick to an increase of 400,000 bpd.

Saudi oil policy is led by Crown Prince Mohammed bin Salman (MbS), who is to fund initiatives such as Vision 2030, an economic reform plan, according to sources.

“MbS is a young crown prince and will be a king for years to come and so he needs moderately high oil prices to help him realize his vision,” said a Saudi source close to government thinking, declining to say. ‘be identified.

“He himself describes the oil and Saudi policy of OPEC, and he indicated that they should stress at the last OPEC + meeting that there will be no more increase,” added the source, referring to the October 4 meeting.

Granted, OPEC +, Saudi Arabia and Russia do not have an official oil price target – OPEC abandoned these efforts years ago as unachievable – and say the production policy is to balance supply and demand.

Saudi Arabia is more dependent on rising oil prices than other key OPEC + members. The IMF estimates Saudi Arabia’s balanced oil price to be around $ 80, higher than other major OPEC producers such as Iraq and the United Arab Emirates. Russia’s, on the other hand, is around $ 40.

Russia, although less dependent on oil revenues than Saudi Arabia, has repeatedly called for increased production this year. In January, it struck a deal to increase its own production, while Saudi Arabia made a voluntary cut. Read more

With shale not seen as a concern at this time, OPEC + calls for faster production increases have faded.

“The return we are getting from shale is for investors to focus on recovering their capital, even with high prices no increase in production is expected in the short term,” another OPEC + source said. .

Reporting by Alex Lawler, Marwa Rashad, Gary McWilliams, Olesya Astakhova, Vladimir Soldatkin, Ahmad Ghaddar and David Gaffen; Editing by David Holmes

Our standards: Thomson Reuters Trust Principles.

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