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U.S. Shale Could Break The OPEC Deal Within Months

Todd Royal, OilPrice

The U.S. shale industry is ready to return with a bang.

OPEC is currently pumping crude at a record rate yet has managed to fool algos and “experts” into bidding up crude to multi-month highs on “promises” it will cut a little over 1 million bpd in output starting in 2017. Alongside this “agreement”, which Russia and other Non-OPEC nations may or may not join depending on whether OPEC states comply with the cuts (Russia has made it very clear it won’t start cutting for a while in the new year), a problem OPEC has long hoped to avoid mentioning, let alone addressing, has emerged. We are talking, of course, about U.S. shale, the biggest marginal swing producer in the world.

The problem, in a nutshell, is one of clean balance sheets (those companies which had to file bankruptcy, have done so by now, and as a result most now have a far lower All-In Production Cost, not to mention far less debt, and re-energized management teams) as well as one of rising efficiency due to drilling technological advances. Nowhere is this more evident than in this excerpt from Bloomberg:

[A]t 8.8 million barrels a day, the U.S. is already pumping almost as much crude as two years ago, with just a third of the rigs it operated at the peak, data from Baker Hughes Inc. and the Energy Information Administration show.

(Click to enlarge)

And while drillers have added about 200 rigs since May, taking advantage of rising prices as talk of an OPEC supply cut circulated, one wonders what will happens to U.S. oil production once the number of rigs returns to its recent historical levels between 1,800 and 2,000?

One thing we do know is that after two years of quietly avoiding the spotlight, the shale industry is ready to return with a bang, and according to Reuters, “U.S. shale drillers are set to ramp up spending on exploration and production next year as recovering oil prices prompt banks to extend credit lines for the first time in two years.”

The credit increase is small, but with major oil producers worldwide aiming to hold down production in 2017, U.S.-based shale drillers are looking to boost market share to take advantage of higher prices, and greater availability of capital will make that easier.

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