Despite an expected slowdown in Permian growth rates, the U.S. shale patch is increasing production and will continue to do so this year and next.
Oil market investors and analysts are currently very much focused on the demand side, with concerns over the potential of trade wars to curb oil demand growth. On the supply side, analysts have shifted their focus onto losses from Iran, crumbling Venezuelan production, and whether OPEC and its allies will be able—and willing—to offset supply disruptions.
Currently, U.S. shale growth is probably the most overlooked supply-side factor, a factor that will likely offset many of the losses from production problems elsewhere in the short term. The big question is for how long U.S. tight oil growth can offset declining production in other parts of the world.
“The explosion in U.S. tight oil production has long been the dominant supply catalyst within the energy complex but now finds itself at the tail end of concerns. Even so, its ascent continues apace,” PVM Oil Associates oil analyst Stephen Brennock wrote in a research note on Wednesday.
“U.S. shale doom-mongers should not get ahead of themselves,” Brennock adds, noting that U.S. shale still has room to grow and currently, the “only way is up.”
“The key medium-term question for the supply side of the oil market is: How much longer can rapid U.S. oil supply growth continue to offset poor production outcomes in the rest of the world?” Longview Economics’ director and senior economist Harry Colvin said in another research note.
If it weren’t for U.S. oil production, the world would be some 5.3 million bpd short of oil supply over the next five years, according to Colvin. But U.S. output “could, and will, fill in most of that gap,” he said, adding that unlike other major oil producers, the industry in America is not determined by politics and has fewer ageing conventional fields from which to expect production declines.
In the shale patch, however, production declines much faster than in conventional oil fields where output can be sustained for decades. There is also concern that the sweetest spots in U.S. shale plays could soon be drilled out and drillers will have to move to harder-to-frack and higher-cost areas. There’s already inflation in oilfield services, wages, and frac sand costs. Then there is the much-talked-about pipeline takeaway constraint in the most prolific shale basin, the Permian, which is expected to slow down the pace of production growth, at least until the latter half of 2019, when most of the pipelines currently in the works are planned to come into service.
This year, U.S. tight oil production is forecast to grow by a record 1.3 million bpd to over 5.7 million bpd, due to increased investment in 2017 and 2018, the International Energy Agency (IEA) said in an analysis last month.
OPEC’s Monthly Oil Market Report from earlier this week expects U.S. tight oil production to grow by 1.22 million bpd on a yearly basis, to average 5.91 million bpd in 2018, unchanged from last month’s assessment. Unconventional natural gas liquids (NGLs) and tight crude combined account for more than 98 percent of the expected total supply growth.
“For 2019, y-o-y growth in U.S. tight crude will occur at a slower pace due to several fundamental constraints, mainly limited pipeline capacity to transfer Permian oil to the Gulf coast,” OPEC said. Tight oil production from the Permian is likely to grow by 640,000 bpd to average 3.40 million bpd in 2019, or about 200,000 bpd less than the expected growth for this year, the cartel added.
Short-cycle U.S. shale production is growing and will grow next year too, albeit at a slower pace. Yet, it may not be enough to plug the gap in just a couple of years, when the slump in investments in conventional fields around the world—the result of the oil price crash—will start to show up in the global oil supply.