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Oil prices sink on U.S. shale oil growth

IEA warns the world can't live on U.S. shale oil growth alone, expressing concerns about a supply shortage.

By
Daniel J. Graeber
A steady pace upward for U.S. shale oil is putting pressure on efforts to balance an oversupplied market, sending crude oil prices deep into red territory early Thursday. File photo by Monika Graff/UPI
A steady pace upward for U.S. shale oil is putting pressure on efforts to balance an oversupplied market, sending crude oil prices deep into red territory early Thursday. File photo by Monika Graff/UPI | License Photo

April 27 (UPI) -- The resiliency of U.S. shale oil basins offset production declines elsewhere in the world, sending crude oil prices on a downward trajectory early Thursday.

Crude oil prices were volatile in Wednesday trading as investors were left navigating through a market characterized by official supply and demand data, geopolitical concerns tied to North Korea, a proposal to overhaul the U.S. tax code and speculation that U.S. President Donald Trump would pull out of the North American Free Trade Agreement, a key part of the regional economic structure.

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A fluid report from the U.S. Energy Information Administration found crude oil stocks declining against a build in gasoline inventories. Total U.S. commercial stocks gained, however, signaling some lingering supply issues remain, despite efforts by the Organization of Petroleum Exporting Countries, with the help of Russia, to balance the market with managed production declines.

"The slump in the conventional oil sector contrasts with the resilience of the U.S. shale industry," a Thursday report from the International Energy Agency read. "There, investment rebounded sharply and output rose, on the back of production costs being reduced by 50 percent since 2014. This growth in U.S. shale production has become a fundamental factor in balancing low activity in the conventional oil industry."

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That follows an EIA brief that found the Permian shale basin in Texas saw production increase for all but three months since January 2016. Production in May is expected at 2.4 million barrels per day, more than double the level from the entire output from shale-rich North Dakota.

Crude oil prices were down sharply in early Thursday trading. The price for Brent crude oil was down 1.85 percent about 30 minutes before markets opened in New York to $50.86 per barrel. West Texas Intermediate, the U.S. benchmark for the price of oil, was down 1.9 percent to $48.67 per barrel.

U.S. resiliency aside, Amin Nasser, the CEO of oil behemoth Saudi Aramco, said the global oil market needs to focus on long-term prospects in favor of short-term gains. Total U.S. oil production last week was 9.2 million barrels per day, though a four-week moving average of exports of 745,000 barrels per day shows the global market is using something other than U.S. shale.

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"The conclusion is clear: oil demand will continue to grow in absolute terms at fairly healthy levels for the foreseeable future," he said at an annual oil summit.

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Nasser's comments could point to lingering production concerns should the United States fail to establish a long-term track record of resiliency. The IEA said that, globally, oil discoveries hit a record low last year as spending declined in response to historically low crude oil prices. Last year posted 2.4 billion barrels of new discoveries, against a 15-year average of 9 billion barrels.

"Every new piece of evidence points to a two-speed oil market, with new activity at a historic low on the conventional side contrasted by remarkable growth in US shale production," IEA Executive Director Fatih Birol said in a statement. "The key question for the future of the oil market is for how long can a surge in U.S. shale supplies make up for the slow pace of growth elsewhere in the oil sector."

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