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OPEC Unable to Shut Down US Shale Oil Producers

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US crude oil production 

The EIA (U.S. Energy Information Administration) reported that US oil production fell by 17,000 bpd (barrels per day) to 9.2 MMbpd (million barrels per day) for the week ending November 20, 2015. US weekly production fell for the second straight week. US production peaked at 9.6 MMbpd in April 2015 and bottomed out at 9.0 MMbpd in September 2015.

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Why US production is slowing down

US production hit its highest level due to higher oil prices and availability of cheaper credit facilities between 2010 and 2014. This resulted in extraction from high-cost shale oil wells. The increase in oil production from the United States and Canada led to an increase in oil supply in the global market. This led to a fall in US crude oil imports from OPEC (Organization of the Petroleum Exporting Countries) countries.

Consequently, OPEC countries decided to pump at record levels, and the resulting oversupply led to a fall in oil prices. In response to this, US high-cost shale producers scaled back their production, leading OPEC members to take over US producers’ market share. However, this game plan was only marginally successful. The fall in crude oil prices led to the decrease in US production from 9.6 MMbpd in April 2015 to 9.0 MMbpd in September 2015. Since, then US production has been slowly increasing. Why?

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Production efficiency

US production hasn’t fallen as much as OPEC countries anticipated. Also, US crude oil production hasn’t fallen as much as the US crude oil rig count over the last year. This suggests that US oil productivity is improving. How? Companies such as Whiting Petroleum (WLL) and Laredo Petroleum (LPI) are preparing for a period of lower oil prices by strategizing their production activity. Better planning, technological advancement, and optimization of labor and drilling costs are key factors for lower break-even costs. As a result, US oil companies are fighting through the period of lower oil prices.

Current US production is 1% more than last year’s level of 9.0 MMbpd. OPEC has weakened US production but has not completely succeeded in its strategy. The EIA reported that US crude oil production is expected to rise to 9.3 MMbpd in 2015, but it could fall to 8.8 MMbpd in 2016. Slowing US crude oil production could benefit oil prices in the short term. However, global supply and demand will be key drivers of oil prices in the long term.

The long-term lower oil prices impact US upstream players such as ConocoPhillips (COP), ExxonMobil (XOM), and Chevron (CVX). ETFs like the iShares U.S. Oil & Gas Exploration & Production ETF (IEO) and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO) are affected by the uncertainty in the crude oil market.

In the next part of this series, we’ll see how the US dollar drives the crude oil market.

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