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Funny what a rising oil price does for an Opec meeting. There is less reason for skulduggery. Held as usual in the world’s spy capital — 14 American and Russian agents were exchanged on the runway of Vienna’s airport in 2010 — frankly, there was little for the oil cartel to hide this year. Production cuts proffered last year by the world’s two largest crude producers, Saudi Arabia and Russia, have worked. Why tinker? Russia feared the threat from America’s shale patch if oil runs up much higher. They need not worry yet.
The decision was to extend output cuts beyond March to the end of 2018. Opec will reassess in the middle of next year, setting the stage for more intrigue. Global oil inventories peaked this past summer, according to International Energy Agency data. In the US, more up-to-date figures show stocks have fallen to the lowest level for this time of year since 2014. Brent has jumped nearly a third since June.
So far, so good. But what about those pesky Americans and their shale oil? Oil production hit 9.5m barrels per day in September, close to the 2015 record. Output could rise another 15 per cent by end-2018 according to Rystad Energy. Shareholders in the exploration companies have in the past happily funded this growth.
Little sleuthing is required to cast doubt on that outcome, however. A peek at the presentations of US-listed oil and gas exploration and production companies, such as EOG, reveals a new-found focus on self-sustaining cash flow. Consensus estimates for the 17 largest exploration and production companies have two-thirds burning through cash this year. It looks worse once dividends are subtracted. The market seems reticent to fund output with equity or debt, so the normally go-go S&P US oil exploration index has trailed all the super-majors’s shares this year, including Chevron and Exxon.
There is no hiding the fact that oil prices will need to keep rallying, probably beyond $70, before US onshore supply causes Opec problems.
The Lex team is interested in hearing more from readers. Will money flow back into shale sooner? Please tell us what you think in the comments section below.