On 4 March, OPEC+, a group of 24 oil-producing nations, which includes 14 OPEC and 10 non-OPEC members, decided not to step up collective oil input through April, with a modest increase being agreed for Russia and Kazakhstan. The decision literally "shocked" the oil markets, according to Bloomberg, sending WTI and Brent prices higher. "OPEC's supply strategy is working because of its unexpectedness and suddenness," remarked Goldman Sachs, which raised its Brent forecast to $75 per barrel for second quarter and $80 per barrel in the third quarter of 2021. For its part, UBS raised its WTI forecast to $72 in the second half of the year.
Soaring Oil Prices
While soaring crude prices are promising an earnings bonanza for oil producers, US shale producers are unlikely to catch up to their OPEC+ rivals in the near term, though the "temptation is strong", according to Reuters.
CHART OF THE DAY: With OPEC+ support, the oil market extends its rally. Brent is enjoying its best YTD period since the launch of the contract 32 years ago.— Javier Blas (@JavierBlas) March 5, 2021
Brent settled at $69.36 (highest close since May 2019), while WTI settled at $66.09 (highest close since Apr 2019) #OOTT pic.twitter.com/iU0XjYZifY
The oil alliance struck a historic deal to reduce output in November 2016 in a bid to stabilise plummeting crude prices. Concurrently, US shale production skyrocketed under President Donald Trump, reaching a record high 13.1 million barrels per day in February 2020. As Bloomberg Quint remarked in November 2020, "the breakthroughs in horizontal drilling and fracking" made it look "as though US production growth might never end".
Unexpectedly, the coronavirus-driven lockdowns slashed a fifth of oil demand worldwide, ending the steep growth of the US shale industry, that had managed to capitalise on OPEC+'s years-long production cuts. In summer 2020, US oil output dropped by 3.4 million barrels a day while numerous shale companies declared bankruptcy.
Rising oil prices are unlikely to breathe new life into US crude production in a a way that returned it to pre-pandemic levels, Occidental CEO Vicki Hollub hinted on 4 March. When it comes to oil demand, Occidental forecasts that it may rebound by the end of this year or the first few months of 2022.
"I do believe that most companies have committed to value growth, rather than production growth," Hollub told CNBC Evolve. "And so I do believe that that’s going to be part of the reason that oil production in the United States does not get back to 13 million barrels a day."
For its part, Pioneer Natural Resources Co believes that US oil production will see little if any growth during 2021, remaining at around 11 million barrels per day.
Joe Biden & Fracking
In addition to this, the Saudis now have an unlikely ally in the White House. Once assuming office, President Joe Biden took a series of measures to undo Donald Trump's efforts to "prop up fossil fuels".
In January, the president imposed a 60-day suspension of new oil and gas leasing and drilling permits on federal lands. Soon after that, Biden "went a step further" and ordered a moratorium on new oil and gas leases on federal land and water areas, CNN reported on 27 January, insisting that this had nothing to do with the claims that the president would "ban fracking". The media outlet argued that federal lands account for less than a quarter of total US oil production.
Still, Dallas Fed suggests that though suspending fracking of federal lands won’t have an immediate impact on oil production, it could slow down crude output in the future. By the end of 2025, the Permian Basin, the world’s largest shale oil and gas field, will produce up to 490,000 barrels per day less than if drilling activity continued at its current pace, according to Dallas Fed's estimates.
Apparently therefore, Saudi Arabia has focused on driving oil prices higher instead of boosting production to compete with the US energy companies. "'Drill, baby, drill' is gone forever," Saudi Energy Minister Prince Abdulaziz bin Salman stated during the Thursday meeting, showing that Riyadh no longer regards the US "shale revolution" as a risk.
Furthermore, since Donald Trump left the White House, his "Twitter" diplomacy is no longer affecting oil prices: as S&P Global Platts' chart indicated, previously, the ex-president effectively "regulated" crude through his tweets in 2018 and 2019, "persuading" OPEC to lower prices when Brent crude was inching towards $70 per barrel.