Is US becoming World Oil Top Dog in 2018?

The US is poised to become the world’s largest oil producer in 2019, the International Energy Agency said, with a stellar output from shale fields offsetting robust demand growth and supply cuts by other producers.

US crude output, which is up 1.3m barrels a day compared to last year, will soon pass Saudi Arabia and could overtake Russia by the end of the year to become “the global leader”, the IEA said on Tuesday according to the London Financial Times.

America oil production is fast approaching the 11 million barrels per Day level which will make the US the undisputed top dog in terms of oil production. However at present Saudi Arabia remains the top Exporter of Crude Oil.

A recent International Energy Agency assessment predicts that in 2018 the US oil production will reach 11 m b/d and is expected to surpass the Saudi Arabian and Russian productions thus toppling the supremacy of OPEC and Russia which dominated the markets for many years.

For a number of years, Saudi Arabia and Russia dominated the oil markets each producing in excess of 9-10 million barrels per day. The combined total production of “OPEC” is around 32-33 million barrels per day. The oil production of Libya, Nigeria, and Venezuela which are members of OPEC has suffered the loss of output due to instability and security problems. Despite this, the OPEC/Russia agreement to cut production by 1.8 million barrels until end of 2018 remains intact. This has helped prices to reach almost $70 per barrel. While OPEC complies with its production cut agreement, U.S. crude output surpassed 10 million BPD in November 2017 for the first time since 1970, the Energy Information Administration (EIA) said last week. Meanwhile in Oman two weeks ago top oil exporter Saudi Arabia called for extending cooperation between the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC producers beyond 2018, after a deal to cut output succeeded in shoring up prices.

The call, the first explicit invitation by Riyadh for long-term cooperation between oil producers, came with oil prices topping $70 a barrel thanks to the deal after they plunged to less than $30 a barrel in early 2016.

“We should not limit our efforts to 2018. We need to be talking about a longer framework for our cooperation,” Saudi Energy Minister Khaled al-Faleh told reporters before a meeting between ministers of OPEC and non-OPEC countries in the Omani capital Muscat Oman in January”. 

THE SURGE OF US OIL PRODUCTION

However, the US oil output has most recently hit the 1970s boom levels. The US government’s Energy Information Administration (EIA) estimates that the US production of crude oil has now reached 10.04 million barrels per day which is double the low levels of 5 million b/d ten years ago. The shale oil revolution has now come full circle and is maximizing production to its highest levels irrespective of what OPEC is doing.

The shale oil is becoming more economical to produce – thanks to the technological advances. Big companies like Chevron and Exxon-Mobil are now exploring shale oil projects.

Recently the New York Times reported, “that a substantial rise in oil prices in recent months has led to a resurgence in American oil production, enabling the country to challenge the dominance of Saudi Arabia and dampen price pressures at the pump”.

“The success has come in the face of efforts by Saudi Arabia and its oil allies to undercut the shale drilling spree in the United States. Those strategies backfired and ultimately ended up benefiting the oil industry”.

The US is still a net importer of crude oil but is also able to export to China and India, and reducing its reliance on imports of Middle Eastern oil.

The latest reports from Reuters indicate that surging shale oil production in Texas and North Dakota is being felt on trading desks in Chicago, Houston, and New York, where a brisk business in West Texas Intermediate crude futures is far outpacing contracts for London-based Brent crude. The increasing liquidity in U.S. oil futures stems partly from the surge in hedging by domestic shale producers but also from growing overseas interest, which pushed outstanding contracts to new records in 2017. Interestingly WTI benchmark (Western Texas Intermediate) is now being referred to more often by traders and analysts eclipsing other benchmark crudes like Dubai. The dominance of Europe’s Brent and America’s WTI crude futures comes despite Asia’s growing share of global oil consumption, up from 27 percent in 2000 to almost 40 percent today. A key reason for the Middle East’s and Asia’s failure to create an oil futures benchmark is that financial commodity trading is not well established in either region.

Middle Eastern major producers are state-owned, and while the Dubai Mercantile Exchange (DME) was set up in 2007 to establish a new benchmark, it has so far not managed to attract enough liquidity to dominate the region.

U.S. exports averaged 1.1 million barrels a day through November 2017, rising to an average 1.6 million BPD in the final three months. That compares to just 590,000 BPD in 2016.

When prices plummeted to below $40 per barrel two years ago, everyone predicted the demise of the shale oil industry. No doubt dozens of small operators went under and disappeared. Those who survived the collapse of oil prices are now reaping the fruits of their perseverance. They proved resilient and managed to cut the cost of exploration and extraction.

As long as the prices remain above $60 per barrel the shale oil producers, as well as the conventional off-shore producers in the USA, are making money.

Orion Drilling Co’s Perseus rig in Webb County, Texas. Oil and gas production in the US state’s Eagle Ford and Permian basins have transformed the global market.

SHALE OIL HAS SURVIVED

According to the New York Times: “Technological advances unlocking oil from tight rocks like shale has led to a drilling frenzy enabling a doubling of output in a decade, transforming unlikely places like North Dakota and New Mexico into world-class petroleum hubs. Pipelines are being built across Texas to serve ports where oil can be pumped onto tankers headed for China, India and other markets.” Also, the advances made in horizontal drilling help shale oil producers to reach new previously untapped sources of oil and gas.

Reuters reported last week that price of oil rose after a survey showed OPEC’s commitment to its supply cuts remains in place, even as U.S. production topped 10 million barrels per day (BPD) for the first time since 1970. So on the first day as of February 2018, the price of the international benchmark Brent futures for April delivery gained 76 cents, or 1.1 percent, to settle at $69.65 a barrel, while U.S. West Texas Intermediate (WTI) crude for March delivery jumped $1.07, or 1.7 percent, to settle at $65.80. Such price levels haven’t been seen since the end of 2014.

Most observers and analysts expect the price to remain around the $70 mark for some time to come, but Goldman Sachs raised its three-month forecast for Brent to $75 from $62 and its six-month forecast to $82.50 from $75. Oil prices, however, prices are unlikely to advance much above $70 a barrel in 2018, given the tug of war between OPEC and the U.S. shale industry, a Reuter’s poll showed last week.

THE DONALD TRUMP EFFECT ON OIL PRODUCTION

The oil industry got a new boost from Donald Trump’s administration. According to the Washington Post 2nd Feb, “the Trump administration is aggressively sweeping aside regulations protecting public land to clear a path for expanded oil and gas drilling”.

The recently introduced tax reforms by the Trump’s administration will help Shale oil producers, off-shore oil giants, refiners and even wildcatters to gain billions of dollars in tax concessions. According to Bloomberg the top four refiners this week reaped $7 billion in gains, led by a $2.7 billion jump announced the end of last week by the biggest refiner Phillips 66.

In the final analysis whilst the U.S is becoming top dog in terms of oil production, Saudi Arabia maintains its position as the top oil exporter. It exports in excess of 7 million barrels per day. The US exports at present are about 1.7 million barrel per day according to CNN Money January 29th 2018.

Sensing the new US Oil threat, Russia and Saudi Arabia are now working closer together. News circulated recently of Saudi Arabia and Russia forging a new oil and energy alliance.

“In the past, an alliance between Russia and Saudi Arabia to influence oil prices, such as that agreed last year, might have inspired awe. Now it is just one of several factors to take into account.”

Nehad Ismail

Nehad Ismail is a journalist based in the United Kingdom. He writes on the economic issues particularly oil and gas. He has a special interest in the Middle East. He worked 15 years in the oil industry and 6 years in the media. He worked in a newspaper and in a TV channel presenting a political program between 2005 and 2010 (Arab News Network). His articles appeared in many esteemed media. He reviewed more than 12 books.
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