The response of US shale production over the next two months may well impact how OPEC decides to finalize the tentative production freeze it announced last week in Algiers, the head of the US Energy Information Administration says.
“Shale has dramatically changed the kind of strategy that OPEC was employing,” Adam Sieminski told S&P Global Platts on Wednesday.
“OPEC will be looking at our production statistics and if they saw US production beginning to recover, would make difference to what they were doing,” Sieminski said an energy seminar at Japan’s Institute of Energy Economics.
Amid recovering oil prices, Sieminski said “there is still financing available in the US oil drilling activities and upstream investments.”
Sieminski’s comments came after OPEC agreed on a blueprint for its first production cut in eight years at an extraordinary meeting in Algiers on September 28.
OPEC ministers agreed to cut production to between 32.5 million b/d and 33 million b/d. The deal would mean a total cut of 200,000-700,000 b/d, when compared with OPEC’s 33.2 million b/d August production, based on OPEC secondary sources.
Final details of the freeze — including individual country allocations and which production estimates are used to verify compliance–are to be decided by OPEC’s next formal meeting, November 30 in Vienna.
OPEC has also said it will seek support for the cut from non-OPEC producers.
Sieminski, who served as chief energy economist at Deutsche Bank for almost seven years before being named EIA administrator in 2012, said the OPEC deal appears aimed at putting a floor under oil prices.
But Sieminski added: “We would have to know how effective those cuts going to be,” referring to uncertainties over production levels in Libya, Nigeria and Venezuela, which have been racked by domestic turmoil.
While EIA is maintaining its view on the timing of rebalancing oil markets towards the end of this year and into the middle of 2017, Sieminski said, “If OPEC is successful in reducing production, it might cause that happen sooner.”
But OPEC would need to be careful about its production cut because it could not only send oil prices but also US shale oil production higher, he added.
US production has proved resilient even without higher prices as the EIA has revised higher its US production forecast for 2017 due to increased drilling activity, rig efficiency and well-level productivity.
EIA forecast 2017 production would be 8.5 million b/d per its latest Short-Term Energy Outlook in September, which was 200,000 b/d higher than its August forecast for next year.
“EIA’s long term projection says oil price will likely to go up so if OPEC cuts too much production, the prices are going to go high,” Sieminski said. “We are going to have more oil production in shale in the US, [which would result in] the less demand so it’s a self-correcting mechanism.”
He reiterated a long-standing concern that he and many other market watchers have had as the oil price slump has persisted: Will the industry’s drastic cuts in capital investments make it unable to support mid-term global oil demand growth?
EIA analysis has suggested that sustained prices below $50/B may not be enough to sustain enough supply, with the global economy starting to pick up.
“EIA’s view is that there [will be] big growth in global oil demand unless we have some kind of global recession, which we are not forecasting,” he said.
“To me an interesting question is goes beyond some of these short-term questions about OPEC’s cut in oil production activities in the near term more towards: ‘Are we going to have enough capital investment in oil area to provide for likelihood of demand for petroleum continues to grow globally over the next five to 10 years because of growth in economy?'”