At a Glance
- Undoubtedly the shale revolution has taken absolute power from OPEC in terms of oil prices, but they still hold more power than the West would like to admit
The acronym “NOPEC” has appeared in the headlines lately and is drawing the attention of crude oil traders. NOPEC stands for No Oil Producing and Exporting Cartels Act, a bill that has made its way to a Senate sub-committee, which would revoke the sovereign immunity that has long protected OPEC members from U.S. antitrust legal action. If passed and signed into law, NOPEC would change U.S. antitrust law to allow OPEC members to be sued for collusion in U.S. courts.
The bill is actually an old dormant bill passed by both houses of Congress in 2007 but then shelved when President George W. Bush said he would veto it. The bill’s reintroduction is clearly playing on the current president’s dissatisfaction with the recent direction of oil prices, but it also says quite a bit about how much influence OPEC still has over oil prices.
The U.S. Energy Information Administration (EIA) has been revising up estimates for U.S. production but even the current official production statistics, which are only through Q2 of 2018, show an all-time record of 10.964 million barrels per day (bpd).
The Marginal Producer
The direction of crude oil prices depends on the “marginal producer,” or the producer whose output rises and falls while other producers’ output remains consistent. Many crude-watchers have called the U.S. the marginal producer lately, but as one can see from the chart, U.S. production has been straight up for the last 10 years, save for the period between April 2015 and August 2016 when prices fell more than 70 percent.
This is the key to understanding who the marginal producer actually is. Shale oil production, more accurately called horizontal drilling, is costly and given the nature of corporate competition in the U.S., drillers will produce as long as prices leave them profitable and demand is there for their product.
The only thing currently standing in the way of more barrels out of these producers is the shale field decline rate, which has also hit a record. The decline rate is the number of barrels being lost to older, less productive wells, measured from their peak to current levels, in barrels per day. According to the EIA, the top five shale fields in the U.S. reached a monthly oil decline rate of -496,000 bpd in August. As of the EIA’s September 17 Drilling Productivity Report, that decline rate had accelerated to a loss of -518,000 bpd (shown as “Legacy production change”).
As the decline rate continues to rise, it will start to become apparent whether or not U.S. producers have applied enough capital exploring for new wells. Many suspect they have not. Shale wells are notorious for producing most of their output in the early stages and tapering quickly. All of this shows that the U.S. shale patch is not nimble enough to change direction quickly and it is therefore not accurate to call this group the “marginal producer”. So who is it? OPEC.
OPEC Still Top Influencer
Anyone who doubts this conclusion needs only to look back at the success of the OPEC/Russia production cuts and where price ended up with the implementation of that policy. OPEC in general and Saudi Arabia specifically can increase or decrease production with very little lead time because of the less cumbersome process that goes with traditional vertical wells. They have been increasing and decreasing for decades and have a decent amount of spare capacity, depending on output levels which for Saudi Arabia, is currently very high.
Even the Paris-based International Energy Agency (IEA) sees this. According to a Bloomberg report, “The International Energy Agency made a direct appeal to OPEC and other major oil producers to boost output, warning that high prices are inflicting damage on the global economy.” IEA Executive Director Fatih Birol went so far as to describe the supply situation by saying “the oil markets are entering the red zone”. It is unclear whether OPEC will increase production based on this or any other request but what is clear for now, is price will be strongly influenced by what they do.