Slate and the cartel: what will shape the price of oil in 2020

Photo: bloomberg

All is not so simple as it seems at first glance.

A confrontation of OPEC+ and the US oil shale industry will be in 2020 largely determine the level of oil prices and, therefore, will be an important factor for the global economy. Judging by the news of the end of 2019, the position of OPEC+ seem to be winning. But not so simple.

On the demand side

The global recession has been avoided. Donald trump clearly hoped to delay the onset of the recession at least until the presidential elections, that is, until the fall of 2020. The Federal reserve system (the fed) three times lowered its key interest rate to stimulate the economy, and in American-Chinese trade war has been a truce.

According to the international energy Agency, oil demand will grow by 1.2 million barrels. a day. Adopted in December 2019 the decision about additional production cuts within OPEC+ will balance the market in the coming year, despite increasing production from offshore fields in Norway and Brazil by about 0.9 million barrels. a day. Russia was in a particularly good position, as Saudi Arabia took on increased responsibilities for production cuts (an additional 400 thousand Barr. a day to OPEC stated+ in total 500 thousand Barr. per day), and Russian companies got preferences — they will not cut production of gas condensate. According to Reuters, the negotiations between Russia and Saudi Arabia took place during Vladimir Putin’s visit to Riyadh in October and early December. Moscow was able to negotiate special terms as a time when the Saudi authorities had to reinforce the IPO Saudi Aramco additional signal support for oil prices.

Shale cooling

After five years of weak performance and a failure of quotes in 2019, investors began to avoid shale companies. Independent U.S. manufacturers are forced to reduce capital investments in the conditions of rigid financial discipline. Top managers of the shale companies already don’t make ambitious statements, recognizing that to restore the confidence they need is not price of WTI below $65 per barrel (approximately $70 per barrel Brent). This view is held, for example, trump’s Advisor on energy issues Harold Hamm, one of the pioneers of shale extraction.

Among other factors in the industry have complicated initiatives to combat climate change, such as the international initiative on disclosure of financial operations related to the climate (Task Force on Climate-related Financial Disclosures — TCFD). Following its recommendations, the companies voluntarily commit to disclose in public reporting data on financing activities, firstly, increasing the risk of climate change (coal mining, oil and gas and power generation based on them), and secondly, consistent with the goals of sustainable development (green technologies, energy efficiency, etc.). Within the TCFD, the company must assess the level of risk of their operations from the point of view of the transition from traditional to new energy. In this system, estimates of shale production is seen as a technology with high environmental risks. In 2019, the initiative was joined already in 795 companies, including several major banks and financial institutions such as Goldman Sachs and Morgan Stanley.

But, despite the difficulties, the production of shale oil in the US continues to grow. The variation in current growth projections in 2020 from 0.4 million barrels. per day to 1.5 million barrels. a day.

Among growth factors it is necessary to highlight the following. First, in 2019 the increase in production mostly in the second half of the year, and even just maintaining it at that level for 2020 will achieve average annual growth of 0.7 million bbl. a day.

Second, production growth in the major industry the Permian basin in Texas, stimulated by the launch of new trunk pipelines with total capacity of +2 million barrels. a day and export terminals. At full capacity, the transport infrastructure will be released in the first half of 2020, allowing companies to run drilled but uncompleted wells and to continue development of high-performance area of the Delaware in West Texas. A stockpile of already drilled wells will allow manufacturers to maintain production growth even in the face of shrinking budgets for capital investments.

Thirdly, about their plans to increase production in the Permian basin in early 2019 announced international oil companies (IOCs) ExxonMobil and Chevron. In total, they plan to increase production by 0.6 million barrels. a day in 2020-2021 years. MNCs, in contrast to shale companies have no problems with money. Increased investment in shale industry — part of the strategy of MNCs in the framework of the energy transition from traditional to alternative energy sources. Shale assets have a relatively short investment cycles compared to traditional extraction. This will enable MNCs to develop a more flexible investment portfolio to quickly occupy strategic niches, when will be updated the energy sector.

Saudi Arabia and OPEC+

How this situation looks from the point of view of OPEC countries+? The growth of shale oil in 2020 may become parties to the agreement is not just a factor to further restrict production, but also the basis to think about further strategy. At the end of 2016, concluding a deal OPEC+ participants expected that about three years later, oil shale production will pass its peak, you only need to wait again to get full power over the market. But in 2020, the growth of shale production, obviously, will continue, and under the “price umbrella” OPEC+ run projects deep-water production in Brazil, Norway and Guyana.

In a negative scenario OPEC+ will count on Saudi Arabia. Unlike Russia, where the resource base is deteriorating and to support the extraction of the necessary incentives for producers, Saudi Arabia has large reserves of low cost of production that the Saudis may leave the bowels in a scenario of long-term decline in demand for oil.

Now, after a December meeting of OPEC+, hard to believe that Riyadh is able to quickly change strategy. But this experience of the Kingdom were already in the 1980-ies. After the launch of new oil fields in the North sea, the Gulf of Mexico and Western Siberia in the early 1980s, Saudi Arabia had to regulate the situation on the market, reducing the level of production. But in 1985, she refused to do the balancing market and increased production that led to the collapse in oil prices. The recent IPO of Saudi Aramco gives crown Prince Mohammed bin Salman more room to maneuver. Let the scale of the IPO is four times less than planned, and it went on the domestic market and not international markets, but their promises the Prince complied, and the position has strengthened, allowing you to make important decisions.

If alternative energy sources will be gradually replaced the traditional, you need to be prepared for the fact that the government of Saudi Arabia will inevitably come to the idea to increase production.

Thus, the balance in the oil market in 2020 may be quite unstable. On the one hand, the problems of shale can give hope to the traditional oil exporters to the favorable situation in the next 5-10 years. On the other — possible high growth of production in countries outside OPEC+, may be a prerequisite for the subsequent termination of the agreement, which would entail a protracted period of low oil prices and a difficult adaptation of exporters to new conditions.

Victor Kurilov, RBC