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Why the return of shale can be disastrous for oil markets

With one year to forget in 2020, the energy sector has become the best performing of all 11 US market sectors. Energy sector SPDR ETF (NYSEARCA: XLE) has grown 41% so far, making the market wider S&P 50011% profit seems downright anemic. Oil prices appear to have stabilized in the upper 1960s, with WTI gaining support at around $ 63 a barrel, while Brent sees support at around $ 65 a barrel.

The sector has successfully introduced Covid-19 vaccination and a gradual economic recovery to thank the revival, with several countries – including the United States and much of Europe – reopening their economies. But even more important is OPEC̵

7;s continued production discipline, with the organization sticking to earlier plans to gradually increase production during its last meeting. OPEC + reduced production by about 8 million barrels per day (bpd), but has now agreed to return 2.1 million bpd to the market from May to July, easing reductions to 5.8 million bpd.

But experts now warn that OPEC +, responsible for more than a third of world production, could see its efforts thwarted by a major rival: American shale.

According to an analysis by the authoritative Oxford Institute for Energy Research, rising oil prices could allow a significant return of US shale to the market in 2022, potentially disrupting the delicate balance of the global oil market.

Related: 3 strong oil and gas reserves for the summer

With the advent of 2022, the US shale response is becoming a major source of uncertainty amid the uneven recovery of both shale games and players. As in previous cycles, US shale will remain a key factor shaping market performance, ”Said institute director Basam Fatou and analyst Andreas Economou.

Market surplus

The institute sets out several possible scenarios, including some that could lead to an excess of oil.

During its last + meeting, OPEC + said it expected global oil demand to increase by 6 million barrels a day in the second half of the year. She said it had stocks of about 70 million barrels below the average for 2021, which is a more optimistic outlook than the previous forecast of 20 million barrels below the average. But Oxford analysts say the expected increase in shale production of 0.95 million barrels a day could easily be absorbed by the market unless the global recovery achieves a serious problem.

However, Fattouh and Economou warned that the market could become surplus by the fourth quarter of 2022 if US shale growth reaches an upper limit of 1.22 million barrels per day and the global recovery in demand is slower than expected.

Restoration of shale

Source: Reuters

What we find alarming in the Oxford report is that only a partial recovery from the US shale industry may be needed for the effects of the extra oil to begin to be felt. Last year, US shale producers extracted more than 2 million barrels a day after oil prices fell to historic lows. Related: Hackers behind the US pipeline attack say they have lost access to ransom money

However, many shale companies are increasing production as oil prices continue to rise.

And that includes companies that have been affected by the deepest cuts. For example, a Texas-based slate producer ConocoPhillips (NYSE: COP) won honors after announcing some of the deepest production cuts at a time when many shale companies were reluctant to cut production and give up market share. The company reduced its production in North America by nearly 500,000 barrels per day, marking one of the largest layoffs by a US producer. However, in its latest call for profit, the COP revealed that Q1 production, excluding Libya, rose 16.4% year-on-year to 1.49 million bpm, which is about 30% higher than the output of 1 , 14 million fight / day in Q4 2020. The COP issued optimistic guidelines, stating that it expects production in the second quarter, excluding Libya, from 1.5 million to 1.54 million war / day due to seasonal reversals planned in Europe and the Asia-Pacific region.

The number of American platforms is constantly growing. The number of key platforms will rise to 602 by the end of the year, a big jump from the 13-year low of 222 platforms last summer. While the direct link between the platforms and production is complex, Oxford analysts have concluded that growing shale production may affect OPEC + ‘s careful calculations.

By Alex Kimani for Oilprice.com

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