News

U.S. Shale Players Could Play Comeback Kid, Benefitting Tankers

Source: Lloyd’s List

October 19th 2016

US shale energy production is set to rebound as oil prices recover, according to some industry executives, a mostly positive development for tanker markets.

The Organisation of the Petroleum Exporting Countries’ preliminary agreement to reduce output has triggered a recovery in the crude oil price, which is now slightly above $50 a barrel, around its highest since mid-2015.

However, just as the organisation’s high output strategy has managed to squeeze out some US shale producers, the policy reversal and subsequent price rebound would mean shale players now have the chance to produce at profitable levels again.

At the Oil and Money conference in London, some prominent US producers were anticipating a recovery in crude oil output. “US production is currently declining but it will come back,” ConocoPhillips chairman and chief executive Ryan Lance said.

Overall, US crude production has been falling since hitting 9.6m barrels per day in mid-2015, official data showed. The US Energy Information Administration expects shale production to fall to 4.4m bpd in November from 4.5m bpd this month.

But many energy officials have agreed that the US shale players will be able to raise output if oil prices increase further.

Their production costs are higher than those of their Middle Eastern rivals but lower than many others, according to Mr Lance, who suggested that oil at $40 a barrel, will be sufficient to put producers in Bakken, Eagle Ford and Permian back in the black.

“At $60, you can easily add another 700,000 bpd [production],” Pioneer Natural Resources chairman and chief executive Scott Sheffield said.

Higher US oil production is generally positive for tanker markets, according to analysts, not least because increased output of byproducts of chemicals and liquefied petroleum gas have pointed to more vessel demand in the two segments.

Crude carriers may also benefit as higher US production will provide more opportunities for exports, even though the volume might not be that large.

The impact on imports could be mixed, however. US refiners might need fewer overseas barrels due to higher domestic supply, and they can also import more if refining and shipping economics are favourable, as the lifting of the export ban results in a narrower price spread between US and overseas grades.

“As the ban on crude oil exports has been lifted and the export infrastructure in the US improves, producers are increasingly able to market and sell the light sweet tight oil in world markets,” Poten and Partners said in a note.

“US refiners, especially the ones in the US Gulf with upgrade capacity will continue to import heavier (and cheaper) grades of crude from foreign suppliers.”

However, while shale production tends to be flexible and output could be ramped up significantly in six to 12 months, there could be some hurdles before the shale players are fully back in game.

“We need to hire 300 people and we fired thousands before,” said Mario Ruscev, chief technology officer of Weatherford International, an oilfield services provider. Some workers might opt for other careers, he added.

The supply-demand fundamentals might matter even more. As the shale producers have been squeezed by low prices amid high output from the Opec, Mr Sheffield suggested it will be more beneficial for them to increase output at a gradual pace.

“If you are going to grow to high [output too soon] again, then oil price is going to collapse again,” he said.