The toppling of Saudi Arabia as the world's top oil producer

Oil production in the United States is set to outstrip both Saudi Arabian and Russian output levels in 2018, according to a recent International Energy Agency assessment.

The magic number is 11 million barrels per day - a level that will topple OPEC and Moscow's supremacy after they have dominated the markets for many years.  

Riyadh and Moscow each produce in excess of 9-10 million barrels per day. The combined total production of OPEC is around 32-33 million barrels per day. But oil production in Libya, Nigeria and Venezuela, all members of OPEC, has suffered due to instability and security problems.

Despite this, the OPEC/Russia agreement to cut production by 1.8 million barrels until the end of 2018 remains intact.

This has helped prices reach almost $70 per barrel. While OPEC complies with its production cut agreement, US crude output surpassed 10.4 million bpd in November 2017 for the first time since 1970, the Energy Information Administration said at the end of January.

Saudi Arabia wants to extend cooperation between OPEC and non-OPEC producers beyond 2018, with Riyadh calling for a deal to shore up prices in Oman three weeks ago.

The call, the first explicit invitation by Riyadh for long-term cooperation between oil producers, came as oil prices recovered after they had tanked to less than $30 a barrel in early 2016.

"We should not limit our efforts to 2018. We need to be talking about a longer framework for our cooperation," Saudi Energy Minister Khaled al-Faleh told reporters before a meeting of ministers of OPEC and non-OPEC countries in Muscat in January. 

A substantial rise in oil prices in recent months has led to a resurgence in American oil production

The surge in US oil production

US oil output has meanwhile hit the boom levels of the 1970s. The US government's Energy Information Administration (EIA) estimates US production of crude oil has now reached 10.04 million barrels per day - double the low levels of 5 million b/d ten years ago. The shale oil revolution has now come full circle and is maximising production, irrespective of what OPEC is doing.

Shale oil production is becoming more economical to produce thanks to technological advances. Giant companies including Chevron and Exxon-Mobil are now developing shale oil projects.

"A substantial rise in oil prices in recent months has led to a resurgence in American oil production, enabling the country to challenge the dominance of Saudi Arabia and dampen price pressures at the pump," reported The New York Times. 

"The success has come in the face of efforts by Saudi Arabia and its oil allies to undercut the shale drilling spree in the United States. Those strategies backfired and ultimately ended up benefiting the oil industry."

The US is still a net importer of crude, but it is also able to export to China and India, reducing its reliance on imports of Middle Eastern oil.

The latest reports from Reuters indicate that surging shale production in Texas and North Dakota is being felt on trading desks in Chicago, Houston and New York, where a brisk business in West Texas Intermediate crude futures is far outpacing contracts for London-based Brent crude.

The increasing liquidity in US oil futures stems partly from the surge in hedging by domestic shale producers but also from growing overseas interest, which pushed outstanding contracts to new records in 2017. Interestingly, the WTI benchmark (Western Texas Intermediate) is now becoming the main benchmark of reference by traders and analysts, eclipsing other benchmark crudes like Dubai.  

The dominance of Europe's Brent and America's WTI futures comes despite Asia's growing share of global oil consumption, up from 27 percent in 2000 to almost 40 percent today.

One reason for the failure of the Middle East and Asia to create an oil futures benchmark is that financial commodity trading is not as well established in either region.

Major Middle Eastern producers are state-owned, and while the Dubai Mercantile Exchange (DME) was set up in 2007 to establish a new benchmark, it has so far not managed to attract enough liquidity to dominate the region.

US exports averaged 1.1 million barrels per day through November 2017, rising to an average 1.6 million bpd in the year's final three months. That compares to just 590,000 bpd in 2016.

When prices plummeted to below $40 per barrel two years ago, everyone predicted the demise of the shale oil industry. No doubt dozens of small operators went under and disappeared. Those who survived the collapse of oil prices are now reaping the fruits of their perseverance. They proved resilient and managed to cut the cost of exploration and extraction.

As long as the prices remain above $60 per barrel, US shale oil producers, as well as conventional off-shore producers, are making money.

Shale has survived

"Technological advances unlocking oil from tight rocks like shale has led to a drilling frenzy enabling a doubling of output in a decade, transforming unlikely places like North Dakota and New Mexico into world class petroleum hubs," reports The New York Times. "Pipelines are being built across Texas to serve ports where oil can be pumped onto tankers headed for China, India and other markets."

Advances made in horizontal drilling also help shale oil producers to reach previously untapped sources of oil and gas.

It must be said that rising production has drawbacks. As supply increases, prices to tend to fall. At the time of writing this piece on February 8, oil prices touched their lowest in six weeks on Thursday after data showed US crude output had reached record highs and the North Sea's largest crude pipeline reopened following an outage.

Brent crude futures were last down 29 cents at $65.22 a barrel by 1453 GMT, having hit a 2018 low of $64.68 earlier. US futures eased two cents to $61.77 a barrel.

The Trump administration is aggressively sweeping aside regulations protecting public land to clear a path for expanded oil and gas drilling

The Trump effect

The oil industry got a new boost from Donald Trump's administration. According to The Washington Post, "the Trump administration is aggressively sweeping aside regulations protecting public land to clear a path for expanded oil and gas drilling". 

The Trump administration's recently introduced tax reforms will also help shale oil producers, off-shore oil giants, refiners and even wildcatters to gain billions of dollars in tax concessions. According to Bloomberg, the top four refiners this week reaped $7 billion in gains, led by a $2.7 billion jump announced at the end of last week by the biggest refiner, Phillips 66.

In the final analysis, while the US is becoming top dog in terms of oil production, Saudi Arabia maintains its position as top oil exporter, exporting in excess of seven million barrels per day compared with the US' 1.7 million barrels.

 

Nehad Ismail is a UK-based writer and commentator on Middle Eastern issues, particularly oil and gas.

Follow him on Twitter: @nehadismail