Post OPEC's landmark decision to cut 1.2 million bbl/d of production in December, an old problem threatens to stall the ongoing recovery in global oil prices. U.S. shale producers in the past few months have been quick to turn on the taps as oil prices continue to recover. Notably, the U.S. Energy Information Administration (EIA) projected yesterday that Permian Basin oil production will increase by 53,000 bbl/d month over month in February 2017. Further, recent acquisitions in the Permian Basin suggest that large energy producers are positioning themselves for a resurgence in oil and gas drilling in the Permian. First, Noble Energy recently announced the acquisition of Clayton Williams Energy to grow its presence in the Permian Basin. The acquisition includes 71,000 acres in the core of the Southern Delaware Basin, part of the Permian. Secondly, Exxon Mobil recently announced that is exchanging $5.6 billion in stock for approximately 275,000 acres of Fort Worth, which will double its holdings in the Permian Basin. The deal is being done with the Bass family, with the prospect of an additional $1 billion in 2020, dependent upon how the acreage performs.
Given how nimble U.S. shale producers are at responding to any increase in oil prices, OPEC will likely have to be satisfied with a long term oil price that is probably closer to $60 per barrel as opposed to $100 per barrel in days past. That said, this most recent downturn in the energy industry has allowed many oil producing countries and public oil and gas producers to trim costs and become profitable in a $60 per barrel world. Time will tell if the energy industry can keep its costs in check and thrive under this new paradigm in oil.
The oil markets started 2017 with a bang on Tuesday morning with oil prices reaching an 18-month high, but quickly turned negative on dollar strength, and more importantly, news that Libyan and Russian production were up significantly in December. Specifically, Russian output in December is said to have held at record highs, while Libyan production is up to 685,000 bbl/d in recent days, more than double what it averaged in Q3 of last year. The extreme volatility in oil that has continued into the New Year, underscores the importance of OPEC and non-OPEC members sticking to agreed upon production cuts. Recall that OPEC member countries agreed to a production cut of 1.2 million bbl/d in December 2016 along with non-OPEC members (mainly Russia) agreeing to cut an additional 0.558 million bbl/d. With cuts expected to have been implemented on January 1, 2017, the market will be watching very closely for any signs of cheating by producers. Should certain countries not adhere to their new quotas, oil prices will likely remain in the $50 - $55 per barrel range for the foreseeable future.
Notably, the International Energy Agency (IEA) recently stated in their final report of 2016 that if OPEC and non-OPEC members stick to their new production quotas, the global surplus in oil will start disappearing in the first half of 2017. Prior to the agreement among producers, the IEA had suggested that the market would not re-balance until the end of 2017. Should OPEC and non-OPEC members adhere to their new production quotas, WTI will likely increase to north of $60 per barrel (positively impacting the balance sheets of all oil producing countries globally). With that said, one wonders why any OPEC or non-OPEC country would want to risk this positive outcome. The next few months will tell the story as to whether 2017 will see a further global recovery in oil or whether oil remains lower for longer.
A Canadian Energy expert