Saudi Arabia, Russia in No Mood to Cave to US Fracking Boom

The recently vaunted decline in US crude oil production, supported by granular estimates, has been used in rationalizing the newly sizzling rally in oil prices. Analysts are digging through local details to come up with clues where this might be going. Money is re-pouring into the sector. And folks are already espousing the next stage, that the glut is over and that a shortage will set in soon, or something.

Alas, the decline in US oil production is, let’s say, relative. The EIA estimated that in the week ended May 1, producers pumped 9.369 million barrels per day. So that’s down from the crazy peak set during week ended March 20 of 9.422 MMbpd. Halleluiah, production is back where it was on March 6! And it’s up 12.2% from a year ago!

Note the circled areas in the chart: these weekly estimates are inherently volatile. In 2014, there were several periods of much sharper declines, even before the oil bust began in early July. Compared to those declines, the recent levelling off – and that’s all it is at this point – seems mild.

US-oil-production-weekly-2014-2015=May01

With US crude oil production on a weekly basis just a smidgen off its crazy peak in March, the other two of the world’s top three producers aren’t cutting back either.

Russia pumped 10.71 MMbpd in April, same as in March. Both months beat last year’s post-Soviet record average of 10.58 MMbpd.

And Saudi Arabia produced a record 10.31 MMbpd in April, after having already set a record in March of 10.29 MMbpd, “a Gulf industry source” told Reuters today. Production in both months beat the prior record going back to the early 1980s of 10.2 MMbpd set in August 2013.

So forget the long-rumored decline in production in Saudi Arabia. It is going to do what it can to get a handle on this situation, from its point of view: it will no longer cede market share. For Saudi Arabia, it’s a matter of survival. It won’t be pushed aside by high-cost, junk-bond-funded, eternally cash-flow-negative producers in the US.

And it needs to fund its bombing campaign and other activities in Yemen. These things cost real money.

But Reuter’s “source” couched it in non-confrontational terms, pointing out that this record production was “an indication of strong demand, especially from Asia, as well as increasing domestic consumption during summer.”

Granted, it’s time to crank up the air conditioner in Saudi Arabia, and thus get the oil-fired power plants to produce the juice and burn the oil. But wait….

Demand in Asia is lackluster. And in terms of domestic demand: wasn’t that the same deal last summer? And the summer before? Doesn’t it get hot in Saudi Arabia every summer? So why these sudden record levels of production? No, this is all about Saudi Arabia’s determination not to be totally marginalized in the global oil markets by the US fracking boom.

Being the low-cost producer, state-owned Aramco has plenty of leeway – something US producers lack. They’re hanging on by their teeth while trying to bamboozle investors and banks into giving them more money to drill into the ground. And producers in Russia, cut off from Western funding, need those petrodollars more than ever. They aren’t going to back off anytime soon. So it looks like this might take a while longer to get worked out, one way or the other.

And exactly, how hot is demand in China, the largest oil importer in the world? When the People’s Bank of China spoke of “big downward pressure,” it wasn’t kidding. Read…  China Downturn Hits US Automakers

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  16 comments for “Saudi Arabia, Russia in No Mood to Cave to US Fracking Boom

  1. NY Geezer
    May 12, 2015 at 2:17 pm

    Of course the frackers can’t compete with the Saudis because their cost of production is much too high. It always has been and it always will be.

    However, I expect them to once again rely on propaganda as a weapon. Its time for their advocates to recycle the stories and cost tables showing how fracking technology has advanced so much in the last couple of years that US frackers can now produce oil and gas at a cost not much higher than the Saudis.

    If their stories were more than just propaganda they would have become self sufficient by now. However, these folks have no shame and they will play the propaganda card again and have their paid experts explain how this time its true without ever admitting that last time it was false.

    • night-train
      May 13, 2015 at 2:56 am

      N Y Geezer: You Sir are spot on. There is always a story to justify turning the bit to the right. In conventional O&G, there is usually a possibility that a prospect can hit really big. Shale plays are what I consider to be “factory plays”, in that they seem to follow more of a manufacturing operational model than conventional O&G plays. The problem is, these “factories” are producing $100 oil and selling it for a lot less. And no end in sight. The economics on shale oil were upside down from the get go and only profitable at unsustainable prices. But, there ain’t no quit in these boys. The only way they stop is to cut off the money supply. And they hope to prevent that with bigger and better stories.

      Okay, I admit that I stretched the truth last time, but this time you can trust me. Honest. Did I tell you about this new process we have? It’s a game changer. Really.

  2. Michael
    May 13, 2015 at 1:14 am

    “So forget the long-rumored decline in production in Saudi Arabia.”

    The fact is that the vast majority of oil produced in Saudi Arabia is still coming from those same six oil fields located in the north east of the country and which include Ghawar, Abqiaq, Safaniya, Berri, Zuluf and Marjan. These super-giant oil fields have now been operating for five decades or so. The only new major oil field discovery since 1968 was that of the Hawtah oil fields. If these extremely mature oil fields, which produce 80-90% of Saudi Arabia’s oil, aren’t already in decline this recent ramp up in production if it is sustained will guarantee that they soon will be.

  3. James lake
    May 13, 2015 at 2:22 am

    It would perhaps be helpful to get a wider view on how this is affecting other nations, the UK, Norway, Canada, Netherlands for example; we always hear about saudi arabia and Russia who both have low production costs

  4. Julian the Apostate
    May 13, 2015 at 6:50 am

    So a fracked well is a hole in the ground with a liar standing next to it? Apologies to Mark Twain.

    • night-train
      May 14, 2015 at 3:43 am

      I had forgotten that gem. it is an oldie but a goodie. It has been my experience that Mark Twain, Will Rogers and W.C. Fields cover most situations.

  5. Dan Romig
    May 13, 2015 at 7:05 am

    Fracking should be the last path chosen for extracting oil out of planet earth when traditional drilling has run dry. The Fed’s money has fueled (pun intended) this a generation before its time.

  6. Colin
    May 13, 2015 at 7:56 am

    The EIA is clueless, and we probably shouldn’t be listening to their estimates. Unless there’s a big economic downturn, you generally have to produce more oil each year. Many countries currently are dropping in oil production. If the United States is dropping even a small amount, that’s a good sign the glut will be over sometime soon(assuming there still is one at this point).

  7. Sam
    May 13, 2015 at 3:25 pm

    Saudi claims oil price strategy success: “Saudi Arabia says its strategy of squeezing high-cost rivals such as US shale producers is succeeding, as the world’s largest crude exporter seeks to reassert itself as the dominant force in the global oil market” http://www.ft.com/intl/cms/s/2/69350a3e-f970-11e4-be7b-00144feab7de.html#axzz3ZvpBP9BY

  8. chistletoe
    May 13, 2015 at 6:24 pm

    Wolf,

    as usual, most people are watching the wrong numbers … after Thanksgiving, a whole lot of people woke up to the extreme contango in the oil futures market …. there was a general prediction that the shale oil efforts would collapse and when it did the price of crude would go to the moon … consequently, a whole lot of players, both big and small, contrived to purchase physical crude and put it into storage.

    Even though they gave the strong appearance of underreporting the situation, the EIA reported that over 100 million barrels has been put in storage in the US … there was strong circumstantial evidence that the Chinese purchased and stored even more than that and that private entities with private storage capabilities put an additional 50 m to 100 m into unregistered tanks.

    However, when crude rose all the way from $41 up to $63, without any decrease in production or increase in demand, the speculators all stopped. The critical number to watch is the weekly amount of imports in the EIA inventory report…. last week it dropped by a million barrels a day from the average it had been keeping and today it was still down 600,000 a day, while finished product imports have also declined.

    Bottom line is that the speculators are just about up to their ears in oil, the contango has evaporated, and the Federal Reserve is still threatening to raise the cost of borrowing for the hoarders.

    I’m looking for a second price drop worse than the first ….

    • May 14, 2015 at 8:00 am

      Astute observation. There will have to be a lot more blood in the street before this is over.

  9. May 14, 2015 at 12:28 pm

    Finance analysts reflexively scrutinize the extraction/drilling side while ignoring consumption … which is where ALL the oil industry’s problems lie.

    Furthermore: most US oil output is hedged, the dump in prices has made hedges much more costly to driller counterparties. As a result, the counterparties are frantically bidding up oil futures contracts hoping that crude prices won’t crash again until AFTER the hedges expire.

    The counterparties win but the cost is the drillers falling farther underwater to their lenders …

    The price of crude will ultimately fall to the level supported by returns on its use, not the credit capacity of consumers. The users are insolvent and can no longer borrow. Since the real returns on use of fuel are minuscule (or negative) look for much lower prices … and much less available oil.

    :)

  10. Sam
    May 15, 2015 at 5:01 pm

    Wolf: Do you agree with the following Economist article’s conclusion that “American shale firms are now the oil market’s swing producers”? http://www.economist.com/news/business/21651267-american-shale-firms-are-now-oil-markets-swing-producers-after-opec

    • May 15, 2015 at 5:53 pm

      Sam, I can see that argument, but here is the problem:

      A “swing producer,” to effectively exercise its power, needs to be able to decide to produce more or less. Saudi Arabia can do that. A handful of people in government and at Aramco, which is state-owned, can decide to cut production – and a few days later, they’re producing less.

      In the US shale sector, there are hundreds of producers, many of them tiny, highly indebted companies. There is no central body that determines how much gets produced. Each company will do whatever it takes to achieve its goals, such as raising more money (always priority number 1 in the permanently cash-flow negative shale sector) or staying out of bankruptcy court (now number 2 for many).

      Within a month, Saudi Arabia could take 2 MMbpd off the table. There is no chance this could happen in the US.

      Production levels in the US don’t follow a central decision but other and diverse priorities. If the money runs out as investor get cold feed, production will eventually drop. If new money pours into the sector, production will rise. How much money pours into the sector depends on the price of oil. If not enough money flows into the sector, many oil & gas companies will collapse…..

      So it’s a complex web of forces pulling in different directions, and I don’t think they’re able to exercise the power of swing producer.

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