February 24, 2017 / 1:04 AM / 6 months ago

RPT-COLUMN-U.S. shale revival likely to cap oil price gains: Kemp

(Repeats Feb 23 column. John Kemp is a Reuters market analyst. The views expressed are his own)

* Chart 1: tmsnrt.rs/2lOpdAs

* Chart 2: tmsnrt.rs/2mfDDXA

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* Chart 5: tmsnrt.rs/2ijPcd9

By John Kemp

LONDON, Feb 23 (Reuters) - U.S. shale producers are growing production again, renewing the challenge to OPEC’s market share and potentially limiting further increases in oil prices during 2017/18.

U.S. crude and condensate production increased in both October and November, the first back to back increases since early 2015, according to the U.S. Energy Information Administration (tmsnrt.rs/2lOpdAs).

Domestic oil production rose to 8.9 million barrels per day (bpd) in November, up from a cyclical low of 8.6 million bpd in September (“U.S. crude oil production increases following higher drilling activity”, EIA, Feb. 21).

Offshore production from the Gulf of Mexico accounted for more than half the total gain, adding an extra 175,000 bpd, with output from Alaska’s North Slope also up 61,000 bpd.

However, production increases were also reported from onshore predominantly shale plays in North Dakota (an extra 65,000 bpd), Oklahoma (11,000 bpd), New Mexico (15,000) and Texas (43,000 bpd).

Production from the contiguous United States excluding the Gulf of Mexico was still down by almost 550,000 bpd (7.5 percent) in November 2016 compared with November 2015.

But the annual decline was sharply lower than in May 2016 when output was down by almost 820,000 bpd (11 percent) compared with the same month a year earlier (tmsnrt.rs/2mfDDXA).

GROWING AGAIN

U.S. oil production appears to have resumed an upward trend, after reaching a trough in September, and output was likely flat or higher in December, January and February.

The number of rigs drilling for oil has risen by more than 280 (almost 90 percent) since the end of May 2016, according to oilfield services company Baker Hughes.

Exploration and production firms are deploying an average of an extra 10 to 15 rigs each week to boost their oil output (tmsnrt.rs/2ltZmgn).

There are now more rigs drilling for oil than at the same time a year earlier, the first year-on-year increase in drilling since early 2015 (tmsnrt.rs/2mfVBth).

And the increase in the rig count understates the extra new production because drilling and fracking operations have become much more efficient.

Rig counts tend to affect recorded output with a significant lag because of delays in fracturing and other completion services as well as the gap before new production is reported.

Recorded increases in output during October and November were likely the result of extra rigs deployed several months earlier.

So the continued rise in the rig count during the fourth quarter of 2016 and the start of the first quarter of 2017 should ensure that recorded output rises for at least the next six months.

UPWARD REVISIONS

The EIA has forecast that U.S. domestic production will rise by 430,000 bpd between December 2016 and December 2017.

Output from the Lower 48 states excluding the Gulf of Mexico is forecast to rise by 360,000 bpd (“Short-Term Energy Outlook”, EIA, Feb 2017).

Past experience suggests shale output often turns out higher than forecast which suggests a strong possibility it will increase by even more than 360,000 bpd over the course of 2017.

The EIA has already revised up domestic production growth for the period December 2016 to December 2017 from 210,000 bpd as recently as November, and shale growth up from just 10,000 bpd.

EIA is now forecasting U.S. domestic output of 9.28 million bpd in December 2017, up from 8.94 million bpd at the time of the November forecast (“Short-Term Energy Outlook”, EIA, Nov 2016).

Forecast production from the Lower 48 states excluding the Gulf of Mexico has been revised to 7.06 million bpd, up from 6.48 million bpd in November.

The EIA has revised both the baseline and predicted growth rates higher in recent months, adding hundreds of thousands of barrels per day of extra production by the end of the year.

OIL PRICE CEILING?

The rapid expansion of shale production was the main reason for the slump in oil prices that began in June 2014 by threatening to increase global stocks and reduce OPEC’s market share.

The forecast growth in shale production in 2017 is still much slower than during the boom of 2013/2014 when production was rising by more than 1 million bpd each year.

OPEC ministers have repeatedly stated they believe oil demand will grow strongly enough to absorb extra shale production while protecting the organisation’s own exports.

But the organisation will not want to see the shale revival turn into a new boom because it would risk a re-run of the price crisis of 2014.

So oil prices may struggle to rise above $60 per barrel for any length of time this year because the resulting surge in shale production and likely reversal of OPEC’s production curbs would tend to undercut sustained gains.

The implied ceiling on crude oil prices for the remainder of 2017 is entrenched in market expectations.

Most energy market professionals expect Brent oil prices to average around $55-60 per barrel in 2017, according to the results of a Reuters survey conducted in January (tmsnrt.rs/2ijPcd9).

Brent prices have been very stable at around $55.50 +/- $1.50 since the middle of December.

Related columns:

* Shale revival looms over oil prices and spreads, Reuters, Jan. 24

* Shale oil and gas sector surges back to life, Reuters, Jan. 23

* U.S. oil and gas industry has turned the corner, Reuters, Jan. 17

* Oil price forecasts for 2017, 2018 rise as downside risks fall, Reuters, Jan. 12 (Editing by Susan Thomas)

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