HOUSTON—Differing cost structures between the U.S. and OPEC oil markets have been significant in causing the two to move in opposing paths, according to Ashley Petersen, senior oil market analysts at Stratas Advisors, who spoke with Hart Energy following the recent “The Bull Returns - Where Do Oil Markets Go From Here?” webinar.
Petersen added that while U.S. producers are basically producing at will OPEC has stuck to following its supply deal. Despite U.S. producers having fewer export constraints now, she said, exporting crude will eventually be more challenging and expensive for the U.S. than for OPEC.
Cost constraints, including the rising costs for fracturing crews, sand, fluids and rigs, are problems the U.S. market faces due to producers primary use of large-scale hydraulic fracturing, Petersen said.
“OPEC is primarily producing from large-scale legacy fields that use more traditional drilling methods. Whereas U.S. producers are constantly drilling new wells while the bulk of OPEC production comes from established wells, OPEC has both overall less drilling activity and lower costs for the drilling they do decide to do given how easy it is to access their reservoirs,” Petersen said.
Petersen said West Texas Intermediate and Brent’s structure differential are other factors going against U.S. producers in 2017. In her synopsis, oil companies are somewhat operating in two different realities.
“U.S. companies are pricing off of U.S. crude, which faces more headwinds due to potentially higher production, slower exports and higher starting points for stocks while other companies are pricing off of more international markets that don’t face as many headwinds.”
Those pricing off of WTI are finding themselves in more of a contango market where they are weighed down by high stocks while international producers, OPEC included, are benefitting from Brent flipping into backwardation and improving at a faster rate, she added.
“With prices structured this way, U.S. producers are just having trouble taking full advantage of the current increase, so while they have seen some benefit they are [essentially] operating in a different market then their international counterparts.”
However, Petersen said this could mean good implications for an OPEC deal extension.
“If OPEC extends, it will lay the groundwork for U.S. supply to continue slowly growing,” she said. “However, if OPEC again decides to pursue an all-out market share strategy thinking compliances are too much to maintain through the year prices will quickly collapse on an oversupply, both physical and expected, as the U.S. could ramp up and as OPEC members ramp back up—this would drive down U.S. output.”
She added OPEC would not gain anything from injecting more certainty into markets it would only allow prices to raise enough for producers to lock in hedges.
“U.S. price recovery is slower because there are concerns U.S. production can ramp up quickly and exports can’t be drained as quickly,” Petersen said. “U.S. crude and product stocks were arguably the most overflowing when the price crash began, because it was U.S. production that was growing so quickly. This means there is just more oil to drain from the U.S. as well.
Instead of scaling back operations, a more conservative move, Petersen said, many companies have turned to increasing the exotic forms of financing to maintain and grow operations levels.
Stratas Advisors expect to see that trend continue for as long as the companies can “swing it.”
Petersen also spoke on the significance of keeping an eye out on non-OPEC and non-U.S. production. Outside of the focus on U.S. and OPEC production, if these forgotten projects come online, there would be no shutting them off just because prices dip, according to Petersen.
“These non-OPEC, non-U.S. projects are typically large-scale slow moving projects,” she said. “If these projects hit market right as U.S. production is ramping up, it could cause an overflow of supply. Alternatively, if these projects are not being approved and built in a timely manner, you could see a shortfall in crude down the road.”
Overall, Petersen exerts that the disconnect between U.S. and international pricing will hamper U.S. growth. Adding that over-exuberance could push too much cash into markets; setting up for a price correction more likely to impact the U.S.
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