Shale Boom Ousts OPEC

Brian Hicks

Written By Brian Hicks

Posted July 11, 2013

OPEC is lowering expectations for 2014.

OPEC cut its demand forecast for next year by 250,000 barrel per day. The group forecasts demand will hit 29.6 million bpd for 2014, which is 2.6% less than current production rates

This would amount to a 250,000 bpd decline from 2013 demand levels and a 770,000 bpd drop from the month of June, Reuters reports. OPEC’s main goal is to keep oil prices from falling below $100.

OPEC logoAccording to OPEC data, world oil consumption will advance 1.2% to 90.7 million in 2014. China’s slower than anticipated economic growth has slowed down oil demand, but Chinese consumption will jump 3.3% to 10.4 million bpd next year.

Non-OPEC supply, mostly led by the U.S. and Canada, is expected to rise by 1.1 million bpd to 55.1 million in 2014.

In the early stages of increased U.S. production, OPEC seemed unfazed by the shale oil boom taking North America by storm. But Iranian Oil Minister Rostam Qasemi believes political, technical, and price-related matters will inevitably slow down American production.

OPEC expects U.S. oil production to grow by 560,000 bpd next year, and world oil consumption will grow by 1.04 million bpd, mostly credited to developing economies around the world.

Currently, OPEC has raised production 380,000 higher than its total goal of 30 million bpd.

Shale Oil Demand

OPEC nations like Iran, Algeria, and Libya have seen their production rates fall due to internal political instability. In June of this year, OPEC cut production volume by 309,100 to 30.3 million due to declining levels in Nigeria, Libya, and Angola.

Shale oil production from the U.S. and Canada has reduced oil imports from Saudi Arabia and light, sweet crude from Nigeria. And many refineries in the Gulf Coast and elsewhere prefer to use thick crude from Canadian tar sands rather than relying on expensive imports from the Middle East. Canadian refineries are also using America’s light crude to reduce imports of the same variety from West Africa.

But U.S. crude demand is expected to grow beyond Canadian refineries; there is serious talk of the U.S. exporting its crude overseas, where it could compete directly with Brent and OPEC crude.

WTI crude has lower sulfur levels and a lighter gravity than international crude. Saudi Arabia has its own light crude, but it mostly defers to West African light crude for direct competition with WTI. But the ramping up of Mississippi Lime crude and oil from the Bakken has reduced the need for African light crude in both the U.S. and Canada. As a result, Nigeria is looking for alternative markets.

And the U.S. has a leg up on OPEC, since the U.S. is one of two counties in the world engaging in shale oil production. Besides Canada and the U.S., the only other country making vast headway in achieving shale development is China.

And while OPEC is a mega-giant in oil production, the shale oil produced from North Dakota, Texas, and Oklahoma is a more sought-after commodity than thick crude from the Middle East or the North Sea.

The top three OPEC producing nations are Saudi Arabia, Iran, and Iraq. Iran was recently knocked from second place after crippling sanctions from the West. Even though Iraq has the best chance of exceeding Saudi Arabian production, al-Maliki is still under the thumb of the Kingdom, and Iraq is being hampered by corruption and sectarian conflict.

If the U.S. exported crude in the future, Russia’s new East Siberian Pacific Ocean (ESPO) light crude benchmark could become a more powerful presence by that time. But WTI crude still surpasses ESPO when it comes to API and sulfur levels.

Some experts believe crude exports in the U.S. could happen by 2030, while others believe it could be possible in the next five years.

Either way, a crude exporting economy could be necessary a safeguard against oil gluts and halted production.

On Thursday morning, WTI crude was $106.40 and Brent hit $108.51.

Gains are being made in local pipeline and railway projects in the Midwest and Gulf Coast, causing the narrower spread between the two benchmarks, but infrastructure is still a problem that prevents WTI from becoming a full competing benchmark against Brent.

U.S. oil investors may not want to hear this, but OPEC may be right: cost, technology and politics are all factors that could slow down production. But regardless of the barriers, oil production will continue no matter what. Rocky shores may indeed lie ahead, but energy companies have the necessary tools to navigate the waters.

Whether or not the U.S. can become a flourishing crude exporting economy that lifts itself from the shackles of OPEC imports is anyone’s guess, but energy drillers certainly have the momentum to make goals possible.

Investment Areas

According to information from the International Energy Agency (IEA), the Bakken and Eagle Ford plays, along with other plays throughout New Mexico, Colorado, and Oklahoma, made the U.S. the largest non-OPEC supplier in 2012. And the IEA expects this trend to continue for the next five years.

For investors, onshore production is the place to be. Offshore oil in the U.S. has mostly been restricted since the 2010 oil spill in the Gulf Coast, with 85% of offshore territory off limits. And although Oklahoma and smaller plays out West are golden areas of shale oil production, it is North Dakota and Texas that are the spearheads of U.S. oil production.

But it remains to be seen if these two states alone can continue to be the primary carriers of shale oil production in the future. More states may have to join the crude bandwagon or boost production numbers going forward.

The Bakken still has the Three Forks formation, a relatively little-explored area that will add more value to North Dakota production. The Bakken has been producing record levels of over 700,000 bpd this year alone, getting closer to 800,000 bpd in North Dakota.

The Bakken comprises 85% of North Dakota production. The Eagle Ford of South Texas has some of the highest investment concentration in the country, and the Lone Star State state also possesses the Haynesville to the east, the Permian basin out west, and the Anadarko basin up north.

Overall, Texas has been outputting 2.4 million bpd of oil.


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