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The Biggest Wild Card In 2020 Oil Markets

Irina Slav

Concern about global oil demand and OPEC+ production cuts are now part of the oil price landscape and few expect any surprises coming from these directions. There is, however, a wild card: U.S. shale production.

CNBC this week quoted an analyst from Macro-Advisory, who included U.S. shale production growth prospects on a list of three factors to watch when it comes to prices.

“The big uncertainty this year — and it is already beginning to be talked about — is: Can or will U.S. producers be able to continue to add as much extra volume as they have been for the last seven or eight years? This is a huge question,” said Chris Weafer.

According to other reports, the question might not be as huge. The Wall Street Journal, for one, has been warning of a slowdown in shale oil production for months now. Despite an upbeat production report from the EIA that showed oil production hat hit a record of 12.66 million bpd in October, the outlook remains uncertain.

A couple of days before the EIA report for oil production in October was released, the Wall Street Journal published another story, about well yields falling short of forecasts as they mature.  A few days earlier still, the daily carried another warning for energy investors: banks are tightening their purse strings for shale oil drillers.

It’s almost as if the WSJ has a personal grudge against the U.S. shale industry.

Related: A Record Number Of Oil CEOs Dethroned In 2019

But the WSJ is not alone, and is merely joining the chorus of analysts who have been warning about the impending slowdown in production growth in the U.S. shale patch for years. While few, these voices, often coming from the industry itself, are aware that first, shale oil production is a lot more capital-intensive than many conventional oil projects and second, that investor patience only goes so far.

This patience is wearing thin now that shale drillers face over $40 billion debt maturing this year, according to Moody’s, as reported by the Wall Street Journal. No wonder, then, that some analysts are expecting a major slowdown in production growth. According to some, who spoke to Reuters, this growth could decelerate to as little as 100,000 bpd. That’s a lot less than what the IEA forecast for U.S. shale in December: the agency forecast growth could slow down to 1.1 million bpd this year, from 1.6 million bpd in 2019.

This should be music to the ears of oil bulls and the Saudi royal family. U.S. shale oil production growth has been a spanner in the works of OPEC’s price-boost plans for years now. The enemy they tried to beat with the maximum-production strategy survived and kept growing, forcing them to cut their own production, but now it may have to stop growing, at least for a while. If it does, prices will rebound.

Just how long the rebound will hold, however, is a different question. Some members of OPEC and its biggest partner, Russia, are eagerly awaiting the end of the production cuts to restart boosting their own production. The likelihood of these eager producers continuing to cut output in the face of slowing down U.S. shale production growth is not particularly great. On the contrary, chances are some OPEC members and Russia would call for an end to the cuts the moment they have enough evidence that the U.S. shale production boom is losing steam.

What this means for prices in 2020 is that we might reasonably expect a rally at some point, the point when the U.S. slowdown becomes a fact. Yet this rally is unlikely to be particularly great or long: that concern about global oil demand is not going anywhere, even with the U.S.-China trade deal.

By Irina Slav for Oilprice.com

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