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Why shale comeback could be disastrous for oil markets

After a year to be forgotten in 2020, this year’s energy sector was hailed as having the best performance among 11 markets in the United States. Energy Select Sector SPDR ETF (NYSEARCA: XLE) gained 41% last year, widening the market. S&P 50011% increase in severe anemia Oil prices appeared to stabilize in the 60s, with WTI looking for support at $ 63 a barrel, while Brent saw support at $ 65 a barrel.

The sector has been successful in its COVID-19 vaccination and a gradual recovery of the global economy to thank for its recovery, with many countries including the United States and most of Europe reopening the economy. But what’s even more important is OPEC̵

7;s continued production discipline, with organizations sticking to previous plans to gradually increase production at the last meeting only OPEC + has cut production by around 8. Million barrels per day (bpd), but it has now agreed to bring 2.1 million bpd back to the market from May to July, cutting that reduction to 5.8 million bpd.

But experts now warn that OPEC +, which is responsible for more than a third of global production, may see their efforts hampered by a major competitor: the U.S. shale.

According to the powerful Oxford Institute for Energy Studies analysis, rising oil prices could significantly bring the U.S. shale back to market in 2022, potentially damaging the rebalancing of the global oil market.

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As we entered 2022, the US shale response became a major source of uncertainty amid an uneven recovery in shale play and players. As in previous rounds, US shale will continue to be a key factor in generating market results.”Said Institute director Bassam Fattouh and analyst Andreas Economou.

Market surplus

The Institute has established a number of possible situations, including some that could lead to an oil surplus.

During the last meeting, + OPEC + said it expects global oil demand to rise by 6 million bpd in the second half of the year. It said stocks were about 70 million barrels below the full-year average for 2021, which is more optimistic than previously projected estimates of 20 million barrels below average. But Oxford analysts said the expected increase in shale yields of 0.95 million bpd could be readily absorbed by the market unless a global recovery enters. Major drawback

However, Fattouh and Economou have warned that markets could turn around surplus by the fourth quarter of 2022 if U.S. shale growth hit a peak of 1.22 million bpd and a slower-than-expected recovery in global demand. Anticipate

Shale recovery

Source: Reuters

What we find alarming about the Oxford report is that the US shale industry may only need some time to recover for the effects of excess oil to begin to feel. U.S. shale producers sank more than 2 million bpd last year after oil prices plunged to historic lows. Related: Hackers Behind US Pipeline Attacks Say They Lost Access to Ransom

However, many shale companies have increased output as oil prices continue to rise.

And that includes the companies hit by the deepest downgrade. For example, a shale maker in Texas. ConocoPhillips (NYSE: COP) was rewarded with the deepest production cuts announcement.At a time when many shale companies were reluctant to cut production and give up market share, it cut North American output by nearly 500,000 barrels per barrel. The day marks one of the biggest cuts by an American manufacturer. However, in the latest earnings call, COP revealed that production in Q1 excluding Libya rose 16.4% Y / Y to 1.49 million BOE / day, a 30% better than 1.14 million baht / day in the quarter. 4th year 2020 COP issues better advice It said production was expected in Q2 except Libya 1.5M-1.54M boe / day due to planned seasonal recovery in Europe and Asia Pacific.

The number of US rigs continues to increase. The number of major rigs is expected to rise to 602 by the end of the year, a significant increase from a 13-year low of 222 last summer. While the direct relationship between rig and production is complex, Oxford analysts have concluded that increased shale output could affect OPEC’s careful calculations.

By Alex Kimani for Oilprice.com

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