Can Slate developments in the US bring down oil prices?


The US is again expanding the production of shale oil, which threatens an oversupply of supply and a fall in prices for it already in 2019. True, the main victims will be the United States itself.

Against the backdrop of global political conflicts between the United States, Russia, Europe, China and Iran, as well as the growing risk of a great war, the topic of American shale, the former key throughout 2012-2015, has taken a back seat. The world turned away from it at the "end of the revolution" stage, caused by the collapse of oil quotes from 140 to 45 dollars per barrel.

Later, the topic finally lost interest to the audience.

It seemed that the "slate revolution was finally extinguished." But a number of current events allow us to doubt this. Moreover, the analysis shows that, in fact, we are at the beginning of a new shale cycle, capable in a second year, in the second half of 2019, of having a serious impact on oil prices in the world, and thus becoming an important factor in geopolitics.

Is the oil needle bad?

Some time ago it was fashionable to talk about the fatalities of the raw curse and the economic destructiveness of "sitting on an oil needle." It was believed that the structure of the economy of the most developed Western countries, primarily the USA, was the evidence of this, especially where the extraction and especially the export of "black gold" amounted to scanty shares, because "smart people earn on advanced technologies".

However, it was later revealed that they did this only because they did not own their own oil fields or, like in America, they considered it to be a national strategic reserve, the development of which was expressly banned by the law for almost 70 years.

It all began, as they often do, from a legal loophole. The ban clearly described the territory where it is "not possible", but its authors did not mention shale deposits, which in their opinion was considered impossible and economically inexpedient. It is difficult to sell oil at a cost of six to seven times higher than the retail price of the then market.

But approximately in 2010, the so-called "super cycle" of sharp and, more importantly, stable growth in demand for oil, which has become a powerful driver of growth in its price, began. Quotations have gone up since 1998, with $ 27 per barrel, so that by 2008, almost touching the "hundreds." But then the American mortgage bubble has loudly burst, which has ruined all world markets, including the oil market.

Nevertheless, the "oil barrel" that fell two times in two years not only played a rollback, but went to storm new price heights further. That's when analysts realized - this is a super cycle, in the long term the price can reach 140-150, and even even 200 dollars.

At that time, the synergistic effect gave a coincidence of two factors. First, as the world's leading oil consumer, the US was in great need of its import. The expansion of domestic production promised the prospect of drastically reducing purchases, or even becoming a large net exporter of "black gold." Plus, it was also expected that it would be possible to make good money on exports, reducing, among other things, the negative balance of the country's foreign trade balance. Secondly, after the mortgage collapse, American investors suddenly felt the presence of huge money, which burned their hands because of the lack of market opportunities for their investment.

Against this background, the slate revolution looked like an oasis in the desert. American capitals jerked into a highly undervalued shale niche.

That this is a "vicious oil needle" did not bother anyone. Oil is the backbone of the industrial pyramid. On average, a single barrel (158.98 liters) produces: 85.55 liters of gasoline; 25.36 liters of diesel fuel; 20.82 liters of aviation kerosene; 9 liters of solvent (mixture of solvents); 8.83 liters of graphite black; 5.68 liters of fuel oil; 4.54 liters of liquefied gas; 3.03 liters of bitumen; 1.51 liters of lubricating oils and their components; 2.68 liters of other nutrients. Strictly speaking, almost half of everything around us is either made of oil, or in its production requires materials obtained from it.

For example, methane with hydrogen gives ammonia, which is the basis of nitrogen fertilizers, very popular in agriculture. Aromatic hydrocarbons give saccharin, drugs, dyes and explosives. Ethylene serves not only as fuel in gas burners, but also as raw material for the production of plastics. By the way, nylon of women's pantyhose is also oil. Refuse to become a key supplier of all this, just because it is the "needle"? What nonsense!

Systemic crisis of investment capitalism

At first everything went well. For four years, the total volume of shale mining jumped four-fold - from 1.4 to 5.5 million barrels. per day. Geologists "found" seven large deposits, of which the most convenient and cheap to develop were two: Perm in Texas (the Alpine High field and others) and the Bakken field on the border with Canada. But then the difficulties began.

While the territory was being developed by pioneers, almost everything was cheap - licenses for production, rent of land, provision of consumables (primarily water), discharge of waste fluid (frac technology is a very dirty business). The cost of production was kept at $ 55 per barrel. However, as the number of participants increased, prices for all steel steadily increased, eventually bringing the cost to $ 90.

In addition, the other flanks of production in shale also affected. In the usual case, it is enough to drill a well to the oil reservoir - and all, know yourself to row the money with a shovel. Here, after a hydraulic fracturing, the well gushes for about a year and a half, at best to three, then the debit drops sharply. Another two or three years it can be maintained artificially - and all, you need to drill the next one.

But on the wave of the first success, investors began to line up, happily crediting the oil producers for future profits: the stock price "under 140" paid for everything, and the blazing "Arab Spring" promised to cut production in the Middle East, thereby providing America the opportunity To replace the Arabs in the status of the leading oil supplier in the world. And then happiness would last forever.

The bubble burst

But "suddenly" it turned out that about a third of the volume of oil trade is provided not by industry, but by investment companies that buy oil for speculation. The announcement of the "beginning of the super cycle" led them to the idea of ​​the profitability of shifting the capitals from the regions into oil, the incomes of giving out those who ceased to exist. This continued to stimulate further price increases, while the actual increase in consumption volumes markedly slowed down.
And then the bubble burst. As soon as analysts noticed that "growth has ended," a great flight of investors began. In the market instantly there was a significant excess of offers, and prices literally collapsed, within half a year rolled down to $ 45.

For some time the harvesters still trembled, shutting down completely developed wells, preserving those where the debit fell significantly, refusing to upgrade the already broken, trying to survive on the breakout of new ones. But the working capital quickly came to an end, the losses grew in an avalanche manner. A general collapse began, affecting not only the miners themselves, but also the industry as a whole - from the service of drilling rigs to carriers and the banking sector, all of which invested.

Improvement of the market

And yet, as it turned out now, the patient's death was only clinical. Three reasons helped to survive.

First, the crisis shook the speculative factor from the prices, returning the production cost to the previous 55-57 dollars. Secondly, when the strongest absorbed the weakest, physical assets (wells, plots, licenses) were assigned with very large discounts. A number of sources indicate that some transactions provided new owners with 70-75% savings.

They received ready-made working and suspended wells with all the infrastructure for a third, and even for a quarter of the price, and even often without the debt burden of the previous owner.

As a result, the average cost price of the shale industry slid even below $ 48, which allowed survivors to hedge the risks at a price of $ 52 per barrel - mainly by signing with the buyers of solid long-term contracts for guaranteed amounts with inclusion in the scheme of insurance companies. This allowed them to stabilize the cash flow and reassure all variables in the complex oil business model.

So the oilmen managed to survive the year of the lowest prices, reaching to the second quarter of 2017, when oil again rose to 60 and quietly sapy crawled up further. True, the survivors could not make full use of the conjuncture. Virtually all volumes of production were contracted (in some cases already until 2023-2025), and the size of the cash flow to massively increase the new production has not yet allowed. But there was a third factor - the policy of Donald Trump.

Oil corporations, therefore, are called transnational corporations, that they work everywhere, regardless of the ownership of specific areas. While their services were required in Russia, Iran, the Middle East, Africa and Latin America, the development of production in the States themselves was not particularly interested because of lower profitability.

But the tough sanctions imposed by Trump did not leave options. It was impossible to help Iran's extraction, because of sanctions and fines of the United States. It is impossible to help Russia (Eastern Siberia, the Far East, the Arctic Ocean) because of sanctions "for the Crimea and Ukraine." With China, too, everything is complicated. Here, the eyes of Exxon Mobil and Chevron turned to the resurgent American shale ...

But Permian and Bakken have long been dismantled. Marcellus is still too complex for development, the Texas Eagle Ford complex due to warming has faced an acute shortage of water necessary for technology.

As a result, the previously poorly developed Niobrara deposit in Wyoming, primarily the northern part of the Powder River with a bedding depth of about 1200 meters, remained. There are still cheap land, available resources and most importantly - free pipeline capacity for pumping oil to consumers.

The latter, by the way, is important because in the main production regions the capacity is close to exhaustion, which becomes a natural obstacle to further production growth.

The second shale wave

In general, since the spring of 2017, the United States has begun to increase oil production volumes. Trump not only reopened the old reserves, but also lifted the ban on offshore production introduced by Obama.

As a result, by the total volume of oil production, the US reached a bar of 10 million barrels. per day, which closely brought them closer to the positions of leaders - Saudi Arabia (10.6 million) and Russia (11 million). Trump pleases the nation by the fact that ten years ago America covered 60% of its consumption with imports, whereas in the first quarter of 2018 it required only 20%. But a much more important issue is the further prospects of the emerging trend, which has already received an unofficial name for specialists from the "second shale wave".

As a result of the above-mentioned events, in the next two years, US shale mining has every chance to grow somewhere else from 0.9 (worst scenario) to 1.6-1.8 (the best scenario) barrels per day, raising America to the position of the leading oil producer planet. From this moment, a big and serious uncertainty begins.

The fall in prices is inevitable

The surplus of the market supply after the price collapse of 2014 was compensated by the agreed decline in production in the OPEC countries and the agreement signed with them by Russia (the so-called OPEC +). As a result, it was possible to create a deficit, plus the world economy managed to adapt to the consequences of the sanctions war of 2014-2015, which in the sum returned oil quotes to the growth trajectory. The prize for the efforts made was the current peak value of $ 80 per barrel of Brent.

However, such a level already forms a significant positive cash flow for American shale, which again opens the doors to investment funds. In addition, Exxon Mobil and Chevron have their own solid reserves of liquidity, which they can send (and will) to expand production. In addition, oil again becomes attractive to financial speculators.

This creates grounds for the outlook for the terminal phase of the previous cycle, since the rate of oil consumption by industry has not changed, so after some time analysts realize that their production is overtaking too much and ... "everything will be as usual".

It remains only to understand - when. The answer depends on OPEC +. If the parties to the treaty continue to adhere to the policy of deterrence, then at the current pace of the new shale boom in the US, analysts call the 2021-2022 boundary year. If Russia and the Saudis renounce the agreement, then, most likely, the excess supply will be critical already in the second half of 2019.

In fairness, it should be said that this task depends on many factors. The results of current competition between Russia and the United States in Asia, primarily in China and India, will play here. Moscow is actively redirecting its cheap and light oil from Siberia and new fields in the Far East.

The world market is not so much a general abstraction as a specific key consumers. It was with them that Trump unleashed a cruel sanctions war, thereby opening good prospects for competitors. As a result, it may turn out that the expansion of shale mining will create a fatal surplus not so much in the entire world market, as primarily primarily in the US market.

Do not forget that when prices rise, consumers try to insure themselves with long standing contracts with a fixed price. So, when prices start to fall, the offer of other big players will still be more profitable for quite some time.

But in any case, in the next two years, we should expect a fall in oil prices, probably to the level of 2015, that is, to "just over 50". It will be hard times.