OPEC and allies may have dug themselves too deep a hole. Instead of holding U.S. oil down with low prices, the 2016 production cut agreement forced U.S. shale producers to adapt. And adapt they did, creating an essentially price-proof oil game that not everyone can play.
In the midst of mediocre prices, U.S. shale growth has prospered. Innovative shale producers took the 2014 oil price crash as an opportunity to evolve, transforming a price-dependent industry into a smart, resilient superpower in just four years.
U.S. Oil Transport Constraint Predictions Miss Their Mark
Today, U.S. production growth is at its highest in 98 years. Houston shale executives are bracing for a “tsunami” of production with thousands of new oil wells in the Permian and New Mexico.
Last year, analysts predicted U.S. pipeline limitations would keep the massive production levels in check through early 2020. But instead of giving in to pipeline restrictions, oil companies transported oil by truck and train.
Meanwhile, pipeline companies incorporated drag reducing agents to increase capacity and pulled new pipelines online earlier than planned.
Cactus II, Gray Oak, and Epic pipelines should start moving oil in fall of next year, shifting production into even higher gear. Permian wells will be ready to roll the second those pipelines open up, adding as much as 2 million barrels of oil per day (MMbbl/d) to U.S. production.
According to the U.S. Energy Information Administration (EIA), total U.S. oil and gas production could hit 17.4 MMbbl/d by the end of 2019, with crude oil production reaching over 12 MMbbl/d. Some say the U.S. could become a net oil exporter at some point next year - for the first time since the mid-1940s.
Extended OPEC Cuts Could Grant U.S. Shale Market Share
The cartel didn’t plan on America’s diehard drive to move oil. The limited transport scenario would have made it easier for OPEC to ease back into production.
Unlike the U.S., OPEC nations still need high prices to make a profit. So far, sanctions on Iran and Venezuelan losses are holding back any serious impact U.S. crude production has on prices. Even Russia and Saudi Arabia have been able to increase production to record levels this month without much effect.
Whether OPEC can convince Russia, Mexico, Kazakhstan, and other partners to extend production cuts into 2019 is the topic for discussion scheduled for a December 6 meeting in Vienna.
If OPEC and allies extend cuts, resulting price increases could hand over the market share to U.S. shale. Saudi Arabia and Russia could make their final decision on ongoing production cuts by the end of next week at the G20 summit in Buenos Aires when decision-makers decide the course of 2019 oil prices.